Stephen Takacsy, president, CEO and chief investment officer of Lester Asset Management
FOCUS: Canadian equities
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MARKET OUTLOOK

Global equity markets continue to look stretched relative to historic valuations and lack of real growth. While Canada is posting the strongest GDP growth of the G7, the Canadian economy and stock market are now at risk from 1) the recent meteoric rise of the Canadian dollar from surprise rate hikes by the Bank of Canada, which were poorly communicated and will hurt exporters, and 2) the potentially devastating impact of aggressively disruptive and unnecessary income tax reforms being proposed by the Liberal government. The negative impact on the Canadian economy will be large as corporations of all sizes will need to liquidate billions of dollars in investment portfolios and be forced to pay out dividends to owners instead of reinvesting in businesses, or face onerous taxes. 

Justin Trudeau and his Liberal party need to stop berating and waging war on the wealthy and now on small businesses, which are the motor of Canada’s economy and are mostly started and run by the average middle-class Canadian. If these regressive reforms go through, money and jobs will move offshore. Our investment focus has and continues to be on Canadian companies, many of them small/mid-cap, that have leading local businesses including growing operations in the U.S., and that will benefit from infrastructure spending. We are also still holding over 10 per cent in cash waiting for better valuations before redeploying excess funds.

TOP PICKS

GOODFOOD MARKET (FOOD.TO)
Largest “meal kit” provider in Canada with 31,000 active subscribers (an estimated 40 per cent of the Canadian market). Sells weekly pre-portioned fresh food and ingredients with recipes delivered directly to the home. Saves time and money for gourmet quality home cooked meals.
Started three years ago in Montreal and reached a gross sales run rate of $36M in the last quarter. We expect run rate is now closer to $50M, and will reach $200M by the end of 2019. Currently moving from 15,000 sq ft to 150,000 sq ft distribution centers, serving all of Eastern Canada including Ontario, and will be opening out west next year. Went public in June at $2 per share and raised $20M.
Grocery chains have started acquiring meal kit suppliers, such as Albertsons buying Plated last week and Metro buying Miss Fresh in August. We expect Goodfood to be eventually acquired by Loblaw or Sobeys, as it makes great strategic sense for these food retailers to help them access the home delivery market. Market cap is around $110M. We recently established a new position at around $1.50 per share with a target price of $5 within two years.

PURE TECHNOLOGIES (PUR.TO)
Leading North American provider of products and services for the inspection, monitoring and management of water, wastewater and pipeline infrastructure. Proprietary technology includes leak prevention, leak detection and infrastructure failure equipment. Sales have grown from $58M in 2012 to $115M in 2016. Sales are up 16 per cent year-to-date in 2017 and we expect continued strong organic growth. Having dealt with some integration issues from acquisitions over the past few years, costs are now under control and EBITDA margins are expanding towards 20 per cent and above. Recently announced US$40M in contracts in the U.S. and a partnership with Xylem for sales in Asia and the Middle East. Stock has traditionally been very expensive and results inconsistent, however price has come down to a reasonable level, while sales and profitability have turned around. Founders are aging and we expect company to be sold within a few years at a large premium. Market cap is around $300M and valuation is at a significant discount to U.S. peers. We recently initiated a new position around $5.30 per share with a target of $7+ within two years.

ROGERS SUGAR (RSI.TO)
Former income trust which owns two sugar refineries in Canada (Rogers in the west and Lantic in the east). Rogers runs a duopoly with Redpath Sugar, and generates strong recurring free cash flow, most of which is paid out in the form of dividends (5.7 per cent yield). Although Rogers has increased its volumes and revenues over the past few years, refined sugar is a low-growth industry, and the stock was considered a “sugar bond." New CEO has recently initiated an aggressive growth strategy by diversifying into higher growth ingredient businesses, and recently completed the acquisition of Maple Treat for $160M. Maple Treat is the largest exporter of maple syrup-based products in the world with 20 per cent market share. We expect Rogers’ new focus on growth to lead to a re-rating of the stock and a high valuation. Market cap is around $650M. We recently initiated a new position around $6.20 per share with a $10 target within two years. 
 

PAST PICKS: SEPTEMBER 22, 2016

D-BOX TECHNOLOGIES (DBO.TO)
World leader in motion systems for the entertainment market (movies, video games and virtual reality) and industrial applications (vehicle training and simulation). We expect seats with D-BOX motion systems to be installed in roughly 3 per cent of all auditoriums worldwide over the next 10 years, following an evolution like that of 3D screens. Stock has come down due to temporary delay in motion seat sales as North American theaters replace seating with recliners. Meanwhile, D-BOX has adapted its motion system for recliners and has now resumed shipments to Cineplex in Canada and to Cinemark in the U.S. We even noticed that some AMC theaters are now advertising D-BOX, so we should see a significant pickup in sales into the U.S. D-BOX also announced its first VR deal with Cineplex last week, which could be a huge market. We expect to see significantly better results over the next few quarters and record revenues again this year. Market cap is of $56M and is grossly undervalued in relation to its global growth potential, lack of direct competitors and growing recurring revenue stream derived from movie ticket sales on an increasing worldwide installed base. Our model indicates a potential stock price of over $1. Recently added. Core holding. 

• Then: $0.70
• Now: $0.32
• Return: -54.28%
• Total return: -54.28%

LOGISTEC (LGTb.TO)
Leading Montreal-based marine cargo handler and environmental services company. Owns marine terminals in over 30 ports in Eastern Canada and the U.S. Environmental division provides site remediation and trenchless water pipe repairs (AquaPipe). Logistec is an infrastructure play on two fronts: port facilities, which are currently commanding huge valuations by pension funds, and the repair of aging North American drinking water systems, which will benefit from increased government stimulus spending. Recently acquired their main water pipe contractor in Ontario to lead the North American expansion of AquaPipe. Site remediation and Aquapipe backlog are at record levels, while container volumes at its recently expanded Montreal terminal have picked up significantly. We expect earnings to be up this year and even stronger next year, so the pullback from the stock’s high of $48 represents an excellent buying opportunity. Increases dividend yearly and regularly buys back stock. Strong management. No analyst coverage. Recently topped-up below $38. Core holding.  

• Then: $35.97
• Now: $37.96
• Return: 5.51%
• Total return: 6.40%

VELAN (VLN.TO)
Global industrial valve manufacturer based in Montreal and world leader in nuclear valves. Benefiting from worldwide infrastructure spending. Backlog weakened over the past few years due to a slowdown in energy-related projects leading to lower sales; however business is slowly picking up again. The company has a new CEO, hired from outside the Velan family, who is focused on improving production efficiency, gross margins, and cutting costs. The company is a classic value investment trading at a discount to net book value per share ($17.40 versus NBV of $19 of which $5 per share is in cash). Velan also owns lots of undervalued real estate which is not reflected on the balance sheet. Family may be preparing to sell the company (the founder is in his late 90's) which could be worth up to $30 if sold to a larger industrial player. Dividend yield is 2.3 per cent and the company regularly buys back stock below book value. Core holding.

• Then: $18.58
• Now: $17.49
• Return: -5.83%
• Total return: -3.68%

TOTAL RETURN AVERAGE: -17.18%
 

FUND PROFILE

Lester Canadian Equity Fund
Performance as of: August 31, 2017

3 months: -0.9% fund, -0.1% index
1 year: 9.1% fund, 7.2% index
3 year: 14.4% fund, 6.4% index

*Index: TSX Total Return (including dividends)
**Fund returns include reinvested dividends and are net of fees
***3 year returns are cumulative returns

 TOP HOLDINGS AND WEIGHTINGS

1. Savaria: 3.6%
2. Boralex: 3.3%
3. Andrew Peller: 3.2%
4. Veresen: 3.0%
5. Park Lawn: 2.9%

WEBSITE: www.lesterasset.com