Two Canadian Small-Caps: Indigo Books and Music, Hamilton Thorne

David Barr and Don Walker of PenderFund Capital Management presented their in-depth investment theses on Indigo Books and Music (Canada: IDG) and Hamilton Thorne (Canada: HTL) at Best Ideas 2020.

Thesis summaries:

Indigo Books and Music is Canada’s largest omni-channel book, gift and specialty toy retailer. They operate 89 superstores under the Chapters and Indigo banners and 111 small format stores under the Coles, Indigospirit and The Book Company banners. With a market cap of 115mln and an EV of 50mln, Indigo shares are trading at around .05x EV/revenue with precedent private market transactions around .19x ev/sales. Over the past year, the stock has sold off significantly after they undertook a very aggressive capex program to transform their stores which led to prolonged stores closures/renovations. This, coupled with a postal strike in their crucial December 2018 holiday season, a mature product assortment and a weaker consumer led to SSS and margins turning negative. With store renovations complete and a strategic focus on improving margins, we think Indigo is poised for a rebound. Further a net cash balance sheet and over 55% family ownership/control gives us downside protection.

Hamilton Thorne manufactures and sells equipment and products to fertility clinics around the globe. They have sold equipment to around 1,000 fertility clinics, giving them roughly a 20-25% market share. The company started solely as an equipment manufacturer (lasers), selling their products through distributors. Five years ago they initiated a plan to build out a direct sales force and add other products to cross sell to their existing customer base. Today, consumable and services, which are recurring in nature, represent around 60% of total sales where as five years ago they did not have any contribution. The industry is growing at around 5-10% per year with the growth coming primarily from delayed childbirth around the globe and the increased adoption of Assisted Reproductive Technology (ART). There has also been an increase in funding sources, with many government and company sponsored health plans now including full or partial funding for in-vitro fertility. In the most recent quarter, HTL reported 17% organic growth (19% in constant currency), outpacing the industry due to success in their strategy of direct sales and cross selling products.

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About the instructor:

David Barr is the President and CEO of Pender. He is also the Portfolio Manager of the award-winning Pender Value Fund and Pender Small Cap Opportunities Fund. He began his investing career in 2000, initially working in private equity. He joined Pender in 2003, was appointed Chief Investment Officer in 2007 before becoming President and CEO of Pender in 2016. Mr. Barr holds an MBA from the Schulich School of Business and earned his Chartered Financial Analyst designation in 2003. Mr. Barr is an advocate of value investing as well as being a true contrarian. He looks for value in unpopular places to find high quality businesses at a price that includes a “margin-of-safety”. Investing in a company trading below intrinsic value decreases the risk and increases the potential for generating significant long term performance.

Don Walker is a portfolio manager at PenderFund Capital Management. He joined Pender after a fifteen year career at an investment firm in Calgary where he managed micro and small capitalization equity funds for the past nine years. Don has a finance and economics degree from University of Western Ontario. He obtained his Chartered Financial Analyst (CFA) designation in 2009 and is a CFA charterholder.