Value for the Money in Canada

01/13/2010 12:01 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Canadian bank notes printer Fortress Paper and commercial landlord Morguard are poised to deliver gains in 2010, write Irwin Michael and Gordon Pape in the Internet Wealth Builder.

We recently met with management of Fortress Paper (TSX: FTP) [about] the company's solid third-quarter results and several key corporate and operational developments. Because the financial results have already been "priced in" to the stock, in this update we wanted to report on the more forward-looking aspects of our conversation. Hopefully, the market will respond positively as management delivers.

The most important near-term issue is the PM1 (Paper Machine 1) rebuild. The conversion of the PM1 machine to a bank note machine will boost capacity of the high-margin product from 2,500 tonnes to 10,000 tonnes per annum. Management seemed certain that the financing arrangement would be announced shortly.

Management also discussed their new "Durasafe" product, which has just become commercially available. Essentially, they have developed a bank note that contains a transparent polymer window that is highly resistant to counterfeiting. Although the company has yet to receive any firm orders, several parties have examined the product, expressed interest, and have begun pricing negotiations. We believe that this innovation will command higher margins than traditional bank notes.

Finally, management discussed potential acquisitions. We would not be surprised to see them purchase one or more related businesses within the next six to 18 months. Additional bank note capacity or technology related to embedded security features seemed to be the key areas of interest. 

Thankfully, with management and insiders' large stake in Fortress Paper, we believe they will be extremely patient and disciplined buyers. All told, we came away very impressed with the company's positioning and outlook.

After the turmoil of 2008, the Canadian real estate market has been remarkably resilient. Home prices rebounded approximately 20% during the year and, thus far, commercial real estate has held up relatively well. In fact, Morguard's (TSX: MRC) occupancy levels are generally down by only a marginal amount. Importantly, the occupancy levels for the third quarter of 2009 improved sequentially from [those of] the second quarter.

The company's third-quarter results demonstrate the stability that a high-quality real estate portfolio entails. Net operating income grew to $38 million in the third quarter of 2009 from $36.9 million in the same quarter of 2008.

[The company continues] to upgrade and improve the quality of its holdings. On October 2nd, the company sold an industrial property in Danville, Virginia for US$5.8 million and booked a small gain. Further, the Morguard Investments Ltd division added two properties in Toronto to the company's real estate management subsidiary.

Current book value is $39.95 and despite excellent share price performance year to date, the stock still trades below its book value. Management has recognized this disparity and repurchased 205,513 shares in the quarter through the company's normal course issuer bid. 

If the company's retail, office, and industrial exposure continue to show stability and investors become more comfortable, we believe that the shares could trade above book value in the coming year.

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