Following a very strong first quarter, Canadian equities as an aggregate traded sideways in the second quarter of 2024. Stock markets are starting to awaken from their summer doldrums, as earnings season is now upon us.
By Jordan Zinberg, President & CEO, Bedford Park Capital
During the second quarter, and consistent with the first quarter, Canadian small and mid-cap stocks outperformed their large-cap counterparts. The majority of the strength we have seen among smaller companies has been underpinned by the energy and materials sectors; however, there have been some outstanding investment opportunities for investors in other sectors as well.
The fund performed nicely in the second quarter, supplementing the best first quarter in our history with some additional gains. For the second quarter of 2024, the Bedford Park Opportunities Fund gained 4.7%*, net of all fees and expenses.
Bedford Park Opportunities Fund performance v Benchmarks
| Q2 2024 | 2024 YTD | |
| Bedford Park Opportunities Fund* | 4.7% | 37.2% |
| S&P/TSX Small Cap Total Return Index | 0.2% | 8.8% |
| S&P/TSX Small Cap Index | 0.8% | 7.5% |
“Go West, young man” is a commonly quoted phrase from the nineteenth century and is attributed to Horace Greeley, a New York newspaper editor. In 1854, Greeley advised Josiah B. Grinnell to “Go West, young man, and grow up with the country. This phrase reflected the idea that agriculture could solve many of the problems present in the U.S. economy at the time, such as unemployment and poverty. Grinnell took Greeley’s advice, moved west, became a lawyer and later a US congressman. He later also founded the town of Grinnell, Iowa.
Given that I’ve lived in Toronto my entire life and am not that young anymore, at this point you are likely wondering why I chose “Go West, young man” as the title for this quarter’s update. The reason is that as I was doing a review of the fund’s positions back in April, it struck me that for the first time ever, the fund owned a significant number of Alberta-based companies.
I have always loved getting out on the road and visiting companies, and had not been out west in a while, so I decided to visit Calgary in late May to meet with the management teams of a few of our investments.
The main objective was to get an operational update from management on each business, but I also wanted to get a feel for what is happening in Alberta, given that it has had the highest population growth of all Canadian provinces for each of the past two years.
Company 1: Mainstreet Equity Corporation (TSX: MEQ)
I spent about six hours with Mainstreet’s CEO, Bob Dhillon, and despite having owned this stock for over four years, I learned quite a bit about the company during our time together. We began at the company’s headquarters, followed by a driving tour of over two dozen Mainstreet properties before capping off the day with a dinner attended by the entire senior management team. The Mainstreet team was very generous with their time, and they clearly take investor relations seriously. I could probably devote this entire letter just to our Mainstreet visit. However, given that we have two other companies to discuss, I will summarize my key takeaways:
- Employee Engagement: The Mainstreet employees that I spoke with seemed very happy, and appear to be extremely loyal, with several of them telling me that they have been with the company for over 15 years.
- Operational Excellence: Mainstreet’s properties were extremely well kept and had consistent branding and signage. Average monthly rents continue to rise steadily, and vacancies have declined significantly: both of these factors act jointly as strong tailwinds for the company’s operating results. Furthermore, the company’s clustering strategy was on full display. The level of density among its buildings in downtown Calgary was extremely remarkable.
- Impressive Growth: The current unit count of 18,000 apartments should grow to 20,000 apartments within one year. In addition, Mainstreet has a ton of capacity for continued acquisitions, with a war chest of over $300 million of available capital.
Mainstreet’s current set up is outstanding with strong demand for housing , rising rents, declining vacancies, and a significant amount of capital to pursue acquisitions. The company’s June 30th results were released on July 23rd and exhibited impressive year-over-year growth across all metrics, highlighted by a record number of acquisitions during the quarter. Mainstreet is one of Canada’s long-term compounders, yet it continues to fly under the radar of most investors.
Company 2: Source Energy Services (TSX: SHLE)
I have written about Source extensively in the last few letters, so I will keep my notes here brief. Here are the key items to watch for with Source for the remainder of this year:
- Debt Refinancing: With the company’s senior secured notes maturing in March of 2025, we expect Source to refinance their debt into conventional bank debt sometime in Q3 or Q4. The current notes have a 10.5% coupon, and if the company can successfully secure bank financing, the interest cost savings will be substantial. This event will also alleviate any concerns around refinance/balance sheet risk while boosting profits.
- Growth: Management recently announced a joint venture with Trican Well Service that will involve the construction of a new sand terminal in British Columbia. Few details have been released, however it is my understanding that Trican will be financing the construction of the terminal, allowing Source to increase volumes without using any of their own capital.
- Contract renegotiations: Contract renegotiations with some of Source’s top customers will take place in Q4. Our expectation is that tight sand supply will allow the company to raise prices
modestly as compared to previous contract levels. - LNG Canada: This a massive project that is led by Shell and includes several other sizable natural gas players. LNG Canada will export natural gas from British Columbia to Asian markets, increasing the demand for sand and boosting Source’s top and bottom line.
A final note here with respect to valuation. This stock continues to look very cheap, currently trading on well below 4x 2025 consensus earnings. As a point of reference, US private equity firm Apollo recently bought US Silica, an American sand business that is similar to Source, at a price of $1.85 billion USD (or 5.4x 2024 Consensus EBITDA). Applying the same acquisition multiple from this deal to Source would result in a share price above $30 per share, more than double (and almost triple) Source’s current share price.
Podcast: Picking Canadian Small Cap Winners with Jordan Zinberg | Ep.114
Company 3: Enterprise Group (TSX: E)
While I wasn’t able to visit Enterprise at their office, we nevertheless had a very productive meeting where management took me through their growth plans. We spent a lot of time discussing their rapidly growing power division, which continues to see strong demand for their line of natural gas-powered generators. Notable takeaways were as follows:
- Exclusivity: The next potential catalyst for the company is an exclusivity agreement with the manufacturer of their generator units, a partner that Enterprise has worked with for many years. Execution of such an agreement is significant, as it would ensure that competitors will not have access to sell these units.
- Attractive Margins: One of the key facets that attracted me to Enterprise was the margin profile. Enterprise has margins well above what would typically be expected for an oil field services business. We continue to monitor the company’s margin profile to see if current levels can be maintained, and perhaps exceeded, as the higher margin Power division becomes a larger portion of the company’s revenue.
- Looking ahead: We are currently modelling $48 million of revenue for 2024 and believe the company could potentially reach $100 million of revenue over the next three years. That said, given its current pace of growth, margin profile, and attractive valuation, I would not be surprised to see the company acquired during that timeframe.
Currently, Enterprise is a small position in the fund, but one that has the potential to become more significant if it can deliver upon its growth plan. We will be watching closely as the company gains momentum and becomes better known to investors in the coming quarters.
Alberta is booming, with relatively affordable housing and the lowest tax rate of all Canadian provinces, which attracts new residents from the rest of Canada and abroad. I came away from our visits extremely impressed with the strength of the management teams at each of the companies I met with, and have noticed a certain type of confidence among several Alberta-based CEOs. We are currently gearing up for second quarter reporting season, and look forward to getting updates on our portfolio companies over the coming weeks.
Enjoy the summer with your family and friends,
Jordan
* Based on time weighted rates of return for lead series (series 1), net of all fees and expenses. Past performance is not indicative of future results.
Jordan Zinberg is the President and CEO of Bedford Park Capital Corporation. Jordan has over 15 years of investment industry experience including portfolio management and trading, and has served as a director of both private and public companies. Before founding Bedford Park Capital, Jordan was a Managing Director and Portfolio Manager at a prominent Toronto-based investment management firm. Prior to that role, Jordan spent 7 years at one of Canada’s largest investment dealers. Jordan holds an MBA from the Schulich School of Business as well as several industry licenses and certifications. He also holds the Chartered Investment Manager designation and is a fellow of the Canadian Securities Institute.
