Onex shares look interesting. I’ll present a bit of the bull case but if you think I’m way off please comment or DM me on Twitter. That’s why I started a substack.
Onex is worth more today than it was at the start of 2020. Hard NAV has increased from $82 to $87 (Q3 value at today’s exchange rate) yet the stock has fallen from $85 to $71 (The S&P is up 20% in that time period).
Onex at the moment is closely associated with its ownership of Westjet. The deal closed at the end of December 2019, just before the worst decline in air travel in history. I’m fairly confident that air travel will return in the second half of 2021, however, even assuming a worst case scenario, Westjet is not a major driver of intrinsic value.
The Westjet deal was not a direct investment, but was actually through the fund, Onex Partners V. Onex’s economic share as a limited partner is just 21%. Westjet was only listed at US$261m on Onex’s books at the end of 2019. That’s just $3 per share against Q3’s hard NAV of $87.
Today, Onex is trading at $71 per share. That’s a pretty attractive discount in its own right (and should widen when the Q4 results come out) but why is it called “Hard NAV”? Because it ignores the asset and wealth management business.
Presently, there is some scepticism on the prospects of significantly larger capital raises at Onex. Onex Partners IV did not have a great start but even with 2020’s challenging economic environment, Onex Partners IV has seen its gross IRR increase from 12% in Q4 2019 to 15% in Q3.
Thankfully, at today’s discount to hard NAV, investors are getting the third party asset and wealth management business for free.
This is a business that as of Q3 had $30b in third party capital with $238 million in annual fees. Just their 2019 acquisition of Gluskin Sheff with ($6bn of AUM) cost them $5 per share, an amount that is now deducted from the hard NAV figure.
Place whatever value you want on their asset and wealth management business but it’s clear that “hard NAV” materially understates Onex’s intrinsic value. And I don’t believe this is some classic value trap either, from 1995 to 2020 the shares compounded at 15% per year, plus dividends.
As an outsider, it can be difficult to gain a high degree of conviction on a financial stock’s book value. There’s a lot of levers management can pull and outside investors such as myself are always at an informational disadvantage.
This is why I’ve always enjoyed following insider transactions, especially at financials where capital allocation is more frequently considered.
Since 1997 Onex has bought back 101.6m shares, leaving 90.3 remaining. They’ve literally bought back more than half the company.
Onex returning a massive amount of money to shareholders is unsurprising given that they are shareholders. Officers and Directors own 1/5th of the company. Most of that is founder and CEO Gerry Schwartz but all senior management are big holders. Take a look at the SEDI disclosures of Robert Le Blanc who was recently promoted to President. He’s personally been buying hundreds of thousands of shares in the open market for the two decades that he’s been working there. In addition, he’s also on the record as wanting Onex to focus on the sectors where they’ve historically had the strongest returns. With Le Blanc now as President of Onex any questions I had on succession planning have been resolved.
In 2020, Onex essentially maxed out the TSX annual buyback limit of 10%. Onex spent more on the buyback in 2020 than nearly the previous four years combined. The buyback actually ramped up in Q3 which is the quarter Le Blanc became President. When asked on the Q3 conference call if the inference was that investors should expect this pace of buybacks to continue? The vice-chair replied that “come next year, we'll renew it again.”
The earliest that can occur is April 17th.
Disclosure: Long Onex
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