Sankai
For the six months ended June 30, 2024, Series B shares fell 0.2%. During that period, the S&P/TSX Index rose 6.1%, while the Fundata Canadian Focused Small/Mid Cap Equity Index rose 8.0%.
It was a disappointing year so far and I apologize for that. However, I am not worried as the year is not over and I am happy with what we own. As you know, our portfolio is quite different from the index. We have invested in a collection of “orphans and misfits” and often bought when others were selling. That does not mean that our investments are broken or bad companies; they have simply fallen out of favor.
Talk is cheap, so I will give some details. The following numbers are my estimates, so please take them with a grain of salt. The holdings listed below, together with our cash position, make up about 90% of our Funds:
- Maxim Power (OTCPK:MXGFF): Maxim is comprised of several components, the largest of which is a 300 MW natural gas power plant in Alberta. I suspect that Maxim will have net cash flow of over $1 per share by year-end. In addition, I believe that in an “average” year, it would not be unrealistic to expect Maxim to generate free cash flow of $1 per share. The stock currently trades at $3.90.
- Exco Resources (OTC:EXCE): Exco, controlled by Fairfax Financial, is a natural gas producer and a “natural hedge” for our Maxim position. Fairfax values Exco on its balance sheet at around $20; Exco’s reserve value exceeds that. The market price is currently $7.76.
- Mandarin Oriental (OTCPK:MAORF): Operates 40 luxury hotels and has a strong development pipeline with 28 hotels and 15 residences. After the sale of its Paris properties, MOIL has no net debt. There is a significant non-core asset that will likely be sold in the next year or two. I estimate net of this asset, we are paying very little, if anything, for Mandarin’s hotel/lifestyle management business and its ownership interests in 12 hotel properties. Jardine Matheson, the majority shareholder, recently acquired additional shares.
Notes:
I have compared our performance to two indices: the S&P/TMX Total Return Index because I find this information useful, and the Fundata Canadian Focused Small/Mid Cap Index because our fund is classified as a small/mid cap equity fund. Please note that our portfolio differs significantly from these indices due to our limited number of holdings, our cash holdings, and our investments outside of Canada. Commissions, ongoing commissions, management fees, and expenses may all be associated with mutual fund investments. Please read the prospectus before investing. The returns shown are the historical annual total returns including changes in share value and reinvestment of all distributions, and do not take into account sales, redemptions, distributions or optional changes or income taxes payable by security holders that would have reduced the return. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Our interim report contains forward-looking information. I will not update this report even if my opinion changes. Although I believe my comments and facts are correct, you should not rely on them without your own verification.
- Wintaai holdings: One of our “hidden assets” is our investment in Wintaai, an insurance holding company. Wintaai has a strong balance sheet and has a shareholder-focused owner in Francis Chou.
- ONEX Corporation (OTCPK:ONEXF): The shares have gained some value, but the discount is still large. As a private equity firm, there are risks; insider contacts offer some protection. ONEX is buying back its shares.
- PrairieSky Royalty (OTCPK:PREKF): We invested during the 2020 oil crash. PrairieSky is essentially a toll booth for oil/gas production in Western Canada and requires no capital whatsoever. PrairieSky currently pays an annual dividend of $1; we paid about $7.95 for our shares.
- Seaport Entertainment (SEG): A collection of assets in New York and Las Vegas recently spun off from Howard Hughes Corp. Seaport is net cash and, depending on how events play out, could be worth many times what we paid. Bill Ackman’s Pershing Square is the largest shareholder and will underwrite an upcoming rights offering.
- Three holding companies: CK Hutchison (OTCPK:CKHUF), Fairfax India (OTCPK:FFXDF) and Jardine Matheson (OTCPK:JMHLY). These are important companies with good balance sheets. In addition, we work with owners I trust. In the past, shares of each of the holding companies have traded at or above their underlying net asset value at times. Today, I expect we are buying them for 50 cents or less on the dollar.
The difficult thing about our portfolio is that I don’t know exactly when the “value” is realized. Some believe in the importance of a catalyst. In my view, a free catalyst is like a “friend with benefits.” I’ve heard they exist, but I’ve never seen one! Peter Cundill and I have often discussed catalysts and have come to the conclusion that if you trust the board/owners, the underlying values are rising, the financial risk is low and the discount to value is large, then just invest.
In terms of the current environment, I believe Howard Marks has a saying: “There are old investors and there are brave investors, but there are no old brave investors.” I feel that perhaps now is not the time to be brave, so as usual and out of caution, I am focusing on finding cheap stocks with like-minded owners. This is not a market judgement, but rather illustrates my desire to become an “old” investor.
Finally, our unaudited half-yearly financial statements and management report on fund performance have been published on our website in the Documents section. If you would prefer a printed copy, just let me know.
And above all, thank you for trusting me with your savings. I appreciate you.
Best regards,
McElvaine Investment Management Ltd.
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Editor’s note: The summary points for this article were selected by the editors of Seeking Alpha.
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