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Geoff Gannon May 27, 2019

“Farmer Mac” A.K.A. Federal Agricultural Mortgage Corporation (AGM): The Freddie Mac of Farms and Ranches Has a P/E Below 9 and an ROE Above Most Banks

This is one of my “initial interest posts”. But, in this case it’s going to be more of an initial-initial interest post. I am in the early stages of learning about this company. And it’s likely to take me some time to get to the point where I can give as definitive a verdict on whether or not I’d follow up on the stock as I normally give in these posts.

First, let’s start with the obvious. As you probably guessed from the name, “Farmer Mac” is a government sponsored enterprise like Freddie Mac and Fannie Mae – except it operates in the agricultural instead of the residential market. The company has two main lines of business – again, this is just like the Freddie Mac business model except transplanted into the agricultural mortgage market – of 1) Buying agricultural (that is, farm and ranch) mortgages and 2) Guaranteeing agricultural (that is, farm and ranch) mortgages.

As a government sponsored enterprise operating in the secondary market for mortgages – the company has the two competitive advantages you’d expect. One, it has a lower cost of funds (on non-deposit money) because it issues debt that bond buyers treat as being ultimately akin to government debt. The same bond buyer might be willing to accept a 2.45% yield on a 10-Year U.S. Treasury bond and just a 3% yield on a Farmer Mac bond. This cost above the rate the U.S. government borrows at is much narrower for Farmer Mac than it is for most banks that make agricultural loans.

The other cost advantage is scale. Yes, there are banks – like Frost (CFR) – that have very low financial funding costs. But, these banks usually have to invest in hiring a lot of employees to build a lot of relationships, to provide customer service to retain customers, etc. that leads to a “total cost of funding” that is higher than what Farmer Mac has to pay. To put this in perspective, Frost’s deposits are basically the same as its earning assets (loans it makes plus bonds it buys). Frost has about $200 million in deposits per branch. This isn’t a bad number – it’s 1.5 times the deposits per branch of Wells Fargo and 2 times the deposits per branch of U.S. Bancorp (and more like 3-4 times the entire U.S. banking industry’s deposits per branch). Frost’s deposits per branch are pretty close to industry leading for a big bank. So, we can use that $200 million in deposits they have and assume a bank will almost never have more than $200 million in assets – because it doesn’t have more than $200 million in deposits – per branch. Farmer Mac has $200 million in assets per employee.

As a rule, one employee is going to cost you a lot less than one branch.

To put this in perspective, most banks spend more on rent relative to their assets than Farmer Mac spends on everything relative to its assets.…

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Geoff Gannon May 27, 2019

Parkit Enterprise: Activist Controlled Parking Lot Owner Looking to Monetize Holdings, Trading at a Discount to Net Asset Value


(Image Created by the Author; Data via Parkit Investor Relations Page and Author’s Calculations)


Parkit Enterprise is a Canadian-domiciled owner of parking lots in the United States.

Investors have forgotten about Parkit, pushing the stock to trade well below its underlying value.


But one investor saw opportunity and has taken the reins to realize the company’s underlying value. Leonite Capital, a family office led by Avi Geller, has acquired a large position, and last year took control of the board.


Following this proxy-fight win, Leonite is looking to extract full value out of the company. But can they achieve what its prior management presumably failed to accomplish? Will realization of full value occur within an attractive timeframe (2-3 years?).


Let’s take at Parkit and see if the current discount to NAV is justified or presents a strong investment opportunity.




Parkit Enterprise, Inc. (TSX.V: PKT; OTCQX: PKTEF) is a Canadian-domiciled owner of parking lots in Colorado, Connecticut, and Tennessee. The stock trades on the Toronto Venture Exchange, as well on the US OTC markets.


Parkit started out as Greenscape Capital Group, a holding company engaged in various “green”-related businesses. After developing the Canopy Airport parking facility, the company decided to sell off its non-core holdings and focus entirely on parking.


The company renamed itself Parkit Enterprise in 2013. Starting in the mid 2010s, Parkit formed a partnership with parking lot management company Propark America to acquire additional properties.


This resulted in Parkit becoming a major investor in two partnerships:


  • OP Holdings JV, LLC. This partnership was formed in 2015 with Och-Ziff Real Estate as the primary investor. In 2015, OP acquired Parkit’s Colorado property, as well as properties in California, Connecticut, and Florida.
  • PAVe Nashville, LLC. a 50/50 partnership with Propark. This vehicle acquired an airport parking facility in Nashville, TN in 2015.


This opaque ownership structure is part of the reason why investors have overlooked Parkit. Like with other similar vehicles (such as Regency Affiliates), there is the added risk of being a “passive investor in a passive investment”.

OP Holdings JV

The bulk of Parkit’s investments are held through OP Holdings JV, a partnership with Och-Ziff Real Estate and Propark formed in 2015.


Parkit owns an 82.83% interest in Parking Acquisition Ventures, LLC (PAVe). Due to the success of two divestitures, Parkit has fulfilled the 15% IRR hurdle due to Och-Ziff. As per the terms of the operating agreement, proceeds from asset sales will now begin to flow to PAVe.


As per the operating agreement, PAVe is now entitled to distributions until it realizes a 15% IRR on its initial capital contributions.


Through OP, Parkit holds interests in 4 properties:


  • Canopy Airport Parking Facility (nearby Denver International Airport)
  • Riccio Lot Hospital Parking (New Haven, CT)
  • Chapel Square Lot (New Haven, CT)
  • Z-Parking (East Granby, CT)


Canopy Airport Parking Facility

(Source: Parkit Investor Presentation, April …

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Geoff Gannon May 19, 2019

Nuvera Communications (NUVR): A Microcap Telecom Company in Rural Minnesota With Stable Earnings and Effective Management That Is Trading At A Cheap Price to Free Cash Flow

Write-up by Carleton Hanson

Investment Thesis Summary

Nuvera Communications (NUVR) is a micro-cap regional telecommunications company that operates primarily in south-central Minnesota. The company has a long history of operating profitably and growing revenues with timely acquisitions, yet due to its small market cap, OTCPK listing, and limited share liquidity NUVR is trading at very reasonable levels. NUVR’s market cap currently sits at about $100 million, with $8 million in net income in 2018 and $10 million in free cash flow. During 2018, NUVR was able to simultaneously grow revenue 20% YoY and begin integrating a major new acquisition, Scott-Rice Telephone Company. The company also benefits from federal programs that pay telecom providers to install fiber data connections in rural and under-served areas. These incentives are guaranteed for 10-year periods and the terms have become even more favorable recently, with payments to NUVR from these programs rising 10% YoY in 2019. The full effects of the Scott-Rice acquisition and increased federal subsidies are becoming clearer as the company moves into 2019, with NUVR generating just over $4 million in FCF in Q1, putting it on track for a 14-16% FCF yield for the year. For reasons I will discuss, I don’t believe the market is keeping pace with the increased value of NUVR’s business and I think an opportunity exists to establish a long-term position in the company at these levels.

For me to get excited about establishing a long-term position in a company, there are a number of things that I look for. First, I want to make sure that the company has stable earnings and cash flow, which indicates that the core business model is healthy. I also want to make sure that the management is trustworthy and effective and that I feel comfortable investing with them for an extended period of time. Ideally, I would also like to see that the company has avenues to grow the underlying business, and if I can get this growth paired with stability at a reasonably cheap price I am comfortable establishing a position. I believe that NUVR meets all of these criteria and is worthy of investment consideration.

NUVR is Stable

One of the major appeals of NUVR is the stability of its core business. At the most basic level, NUVR provides phone, video, and internet service to its customers for recurring monthly fees. NUVR is responsible for keeping up the maintenance of their infrastructure and providing customer support, but if they can do that the company gets the benefit of steady cash flow coming in every month as customers pay their bills. As a value-add for customers, the fact that NUVR has voice, video, and data/internet options allows customers to bundle their telecom products together into one monthly bill, giving them one point of contact when they need support and a discount from NUVR for using multiple services. While there is competition from other companies offering individual services, few offer bundled services to their customers, making NUVR …

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Geoff Gannon May 19, 2019

DPI Holdings Berhad (KLSE:DPI): A Tiny Developing Market Aerosol Paint Manufacturer/Distributor with 16%+ Operating Margins, Wholesale Pricing Power and 12 to 15 Years of Growth Capex in the Bank

Write-up by Warwick Bagnall

DPI is a Malaysian manufacturer/distributor of aerosol paint and paint solvents.  It’s listed on the ACE market, a secondary board of Bursa Malaysia.  It listed in early 2019 and was heavily oversubscribed so it’s not exactly overlooked.  Market cap is around MYR 85 MM (one USD is a little over four MYR at the time of writing) so it is a microcap.  Normally I wouldn’t bother to look at a recent IPO but two things made me take a closer look – I think consumer paint businesses have significant pricing power and DPI reports margins that are higher than most paint businesses.  It doesn’t hurt that the share price is well below the IPO price of MYR 0.25.


The company segments total revenue into three product categories – aerosol paint (73%), industrial aerosols (8%) and solvents (19%).  It sells these products through three channels – 70 distributors within Malaysia, via DPI-owned distributor DPIC which has 630 sub-distributor and reseller customers within Malaysia and to eight private label customers, six of which are located outside Malaysia. Most of DPI’s business is in Malaysia but it has recently indicated that it intends to enter the Myanmar and Vietnamese markets.


Aerosol paint manufacture is not high-tech and for a manufacturing business it doesn’t require much capital.  I estimate you could set up a factory like DPI’s replacement cost of MYR 20 MM in the same location with similar input costs and start trying to sell to Malaysian distributors within 12 months.  You could also import similar products from suppliers in China, duty free and with a freight cost that would detract from your margin but not prevent you from making a decent profit at the same price DPI sells for.  At the very least, one of the other multinationals with factories in Malaysia such as Nippon Paints should have competed DPI’s margins away long ago.  But that hasn’t happened – DPI made an operating margin of 16 to 25% between 2016 and 2018.


Paint businesses such as Sherwin-Williams (NYSE:SHW) and RPM (NYSE:RPM) are generally known for having pricing power and steady operating margins in the low teens.  But DPI’s is exceptional.  I can find only one other paint businesses with similar profitability to DPI – Samurai 2K (SGX:13C) which is a direct competitor to DPI.  I don’t think this is a coincidence.


To value DPI at anything higher than liquidation value requires three things:

  • Confidence that they can maintain market share and pricing power in Malaysia.
  • Confidence that management and competitors won’t attempt to grow market share by cutting prices.
  • Willingness to substitute transparent unit economics for a long term history of profitability under public ownership. The company has been listed less than one year.

I’m going to focus on the aerosol segment of DPI’s business.  DPI sells solvent at a gross margin around 3%.  There don’t appear to be any synergies between the solvent and aerosol businesses – DPI’s competitor achieves similar or better …

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Geoff Gannon May 12, 2019

GAP Inc. (GPS): A Market Leader in Apparel Retail Is Spinning Off Underperforming Assets Which Should Drive Shareholder Value, But Income Derived From a Third-Party Credit Card Agreement Overstates The Company’s Earning Power And Makes the Stock Too Risky

Write-Up by Jonathan Danielson

Gap Inc. (GPS) is a company everyone should be familiar with: they’re an apparel retailer that specializes in ‘casual classics’. Meaning, jeans, khakis, polos, button downs, etc. The Company is headquartered in San Francisco and was founded in 1969. Gap Inc. has acquired and launched several brands over the years, but its main ones currently are: Old Navy, Gap Brand, Banana Republic, Intermix, and Athleta. GPS has increasingly become an Old Navy company over the years as consumers have flocked towards value brands and have deserted higher end specialty brands so it wasn’t too terribly surprising when they announced at the end of last quarter their intentions of separating into two companies. Interestingly enough, Old Navy will be the RemainingCo operating as a stand-alone business while Gap Brand, Banana Republic, Athleta, and Intermix will be spun off.


Based on consolidated metrics, GPS appears to be an interesting situation. When I pull the company up on I see a company that has 10 year averages of:


  • Gross margins: 38%
  • EBIT margins: 11%
  • ROE: 29%
  • ROIC: 34%


All for a P/E of 10 and an EV/EBITDA of 6-ish. Not bad for a retailer. In fact, I was expecting much, much worse. If you pull almost any of their peers up and measure them on the same metrics you get an entirely different picture. More specifically, I looked at Guess, American Eagle, and Abercrombie and Fitch. Let’s just say when you pull those company’s financials up it looks like they have been existing in an era where questions are being raised about the viability of the brick and mortar retail business models. So, perhaps there’s an interesting situation here after all. Gap Inc. only grew revenue at a 1.8% CAGR over the past 10 years. However these are consolidated numbers and Old Navy is being spun off, remember? And Old Navy has been growing faster than the rest of Gap. Inc’s brands. Additionally, the “peers” I listed above most likely aren’t peers – not for Old Navy at least. The companies I previously listed are closer to Gap Brand and Banana Republic. The closest peer for Old Navy is probably somewhere in between Ross and H&M. Ross has been able to maintain healthy margins and growth while it appears H&M has struggled of late. Nonetheless, both companies look much healthier than any of the specialty-type brands previously listed.


We might have a compelling thesis on our hands if Old Navy is all that management cracks it up to be. The answer, as typically the case, isn’t so clear as one would hope. After all, GPS is operating in an environment that’s been dubbed the retail apocalypse. We’re living in the age of Amazon, how is your classical brick and mortar retailer churning out 34% returns on capital? Is Old Navy really that good? Well, I have my suspicions that it might not be the case. I’ll walk you through the numbers, show you how …

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