Tag Archives: CKI.TO

Clarke Inc launching tender offer

When I entered my position in Clarke in the beginning of December I wrote the following:

Given the large cash balance after the sale of Supremex there might even be more in the cards than just the current repurchase program.

This proved to be a prescient comment since the company announced a sizable tender offer yesterday for 2.5 million shares at a price of $9.5. The 2.5 million shares represent 12.8% of the outstanding shares, and given the ~30% discount to NAV this transaction could provide a nice boost to intrinsic value. If they are able to repurchase 2.5 million shares NAV per share (adjusted for unrecognized pension assets) would increase with 4.35%. That’s an easy way to make money. Whether or not they will be able to repurchase the full 2.5 million shares remains to be seen since they are offering a small premium compared to the last trading price.


Author is long Clarke Inc

Clark Inc revisited: a bargain after all

When I looked at Clark two weeks ago I thought that it was an interesting company, but not a great deal at the current discount. Fortunately my readers alerted me in the comments that there was a little bit more to the story than I thought. The company has a pension asset that is not recognized in the book value making the actual discount bigger than I calculated, and at the same time there is no tax liability for the pension assets that are on the books (there is only an unrecognized liability for the unrecognized assets).

In the past two weeks the company also sold its stake in Supremex, bought back a bunch of shares while its share price dropped almost 10 percent. This means that the current discount to (adjusted) book value is a lot higher now:

Clarke Inc discount to NAV

An adjusted discount of almost 28% isn’t too shabby considering the decent track record of value creation at Clarke. This discount doesn’t incorporate a liability for the expected overhead at the holding company level, but it also doesn’t incorporate the alpha that the company creates by buying back shares and paying a dividend. I didn’t incorporate this in my model when I first posted about the company because I thought that the discount to intrinsic value was minimal. Buying back shares and paying a dividend doesn’t generate meaningful value when the discount is small. But it certainly does when the discount is almost 30%:

Clarke Inc adjusted NAV

The company is currently on pace to buy back 5% of its outstanding stock this year. Buying one share at CA$9.90 that is worth CA$13.70 generates a profit of CA$3.80. Multiply this number with 5% of the outstanding shares and you generate CA$3.7 million/year. Capitalize this stream of alpha at a 10% discount rate and the value of the share buyback opportunity is CA$37 million. The value of the dividend can be calculated in a similar manner since you can use the dividend to buy additional shares yourself. Since the dividend represents a 4% yield the potential value of the dividend is roughly four fifths that of the share repurchases.

At the current discount the value of these two streams of ‘alpha’ is significantly more than the negative value of the holding company overhead. It is important to realize that this calculation does not imply that the fair value of Clarke is CA$16.11/share because at that share price repurchasing shares would actually shrink NAV/share. With a little bit of trial and error we can find the share price where the ‘adjusted discount III’ is zero:

Clarke Inc fair value

This means that Clarke Inc should be trading close to book value. But given the reflexivity between intrinsic value and price this doesn’t mean that the current intrinsic value is CA$13.13/share. The longer the company continues to trade at a discount the more valuable it becomes. This will give shareholders two ways to win. If the discount persists or grows the company will be able to grow intrinsic value at an above average rate while a shrinking discount would imply, ceteris paribus, a higher Clarke share price.

Of course this is all assuming that George Armoyan is neither expected to outperform nor underperform the market. While I was skeptical about his abilities/his track record in my initial post on the company I do think it’s more likely than not that he is able to generate some positive alpha. A ten year 14.4% CAGR versus 5% for the S&P/TSX is pretty decent after all, even with lumpy results and a lot of underperforming years. And the most important thing is that you are absolutely not paying anything for this possibility at the current price point.


Clarke is not the proverbial 50 cent dollar, but I don’t think it’s wise to focus on a more or less arbitrary hurdle. What’s very important is how certain you are about the undervaluation. A company that you know for certain is undervalued by 10% might be a better bet than a company that you think is undervalued by 50%. One of the biggest reasons that you need a margin of safety is in my opinion to protect yourself against valuation mistakes. Given the relative straightforward valuation of Clarke I think there is a pretty low probability that I’m wrong about the appropriate discount for the company.

It also makes sense to be willing to accept a slightly lower discount when you have a little bit of faith in the capabilities in the manager. You could of course try to incorporate this in the valuation model, but that would be pretty arbitrarily I think.

Bottom line is that Clarke is almost certainly too cheap at the current price, and with both a decent share repurchase program and a nice dividend yield there is a solid opportunity for both the company and shareholders to create value. Given the large cash balance after the sale of Supremex there might even be more in the cards than just the current repurchase program.


Author is long Clarke Inc

Clark Inc: the Canadian Icahn at a discount?

Clarke Inc is a Canadian holding company that is run by activist investor George Armoyan. Just like Carl Icahn George Armoyan has a bit of a reputation as a bully. He actually got banned from a couple of municipal buildings in Halifax last month because of ‘threatening’ behavior:

“They made me wait for an hour and 15 minutes without giving me the courtesy to come out,” said Armoyan, whose family company, Armco Capital Inc., is one of the largest development firms in Atlantic Canada. “Then all of a sudden I see police guys come over because I was tapping my feet and I was looking agitated and angry.”

The attraction of Clarke is that the company is trading at a discount to net asset value, the company is steadily buying back shares and it is paying a decent dividend. How big the current discount to NAV is is easy to calculate since the majority of assets are publicly traded:

Clarke Inc NAV

As is visible the company is trading a decent discount to NAV, but a discount less than 20% is ordinarily not enough to get me interested. Unless the investments of the holding company are capable of outperforming the market a holding company deserves to trade at a discount because it has overhead costs and there are usually tax inefficiencies.

Tax inefficiencies seems to be minimal at Clarke because it doesn’t pay taxes on capital gains or dividend income. It might have to pay income taxes when the pension benefit asset is realized. I wasn’t able to figure this out with certainty, but I do think it is probably that they have to pay 31% in income taxes when it is realized (if I have a reader that knows this for sure, that would be nice). Assuming that they need to pay taxes this would reduce NAV by CA$9.3 million.

The negative value of the overhead is a bit though to figure out since the company used to own operating subsidiaries that have their results consolidated. George Armoyan got paid close to a million dollars in pension benefits last year, but since he is now only the chairman of the board and not the CEO that might not continue. But the new CEO is obviously getting paid, they have a CFO and probably some other staff at the holding company level as well. And there is of course an auditor to pay, and I assume they have an office somewhere as well. At least CA$2 million in yearly operating costs is probably an optimistic estimate. Capitalize these costs at a 10% discount rate and we have another CA$20 million liability that is missing from the NAV. If we would include this and the taxes in the calculation the discount would be a meager 7.4%.

The last major component missing from the calculation is whether or not the investment manager is able to generate (positive) alpha. This is something that I usually don’t want to bet on, but in this case it might be reasonable. The latest quarterly contains the following graph:

Historical results Clarke IncThis looks like a pretty decent result, and it is. Book value increased at a 14.3% CAGR while both the S&P/TSX and the S&P 500 managed something closer to 5% during this period. While this sounds pretty impressive I’m actually a bit skeptical whether or not this result is attributable to skill instead of luck. If we ignore the past two years where Clarke posted phenomenal results the company would have performed roughly the same as the S&P/TSX for an eight year period but with more volatility. Not being able to beat the index for an eight year period sounds pretty crappy to me, but I might be overly harsh? It doesn’t inspire confidence.


If you think George Armoyan is able to beat the market Clarke is probably a pretty good investment, especially if he is able to beat the market at a significant clip. If he is unable to beat the market – and unfortunately that is for most investment managers the case – the company is probably just marginally undervalued.

To be fair: I haven’t included the impact of the share repurchases in my calculations. Buying back approximately 5% of the outstanding shares/year at a ~15% discount (taking taxes on the pension asset into account) should result in a little bit of alpha. It’s not very meaningful though.


No position