National Bank of Canada released in October 2015 a comprehensive study of Canadian family-controlled public companies. It examined how 30 of this country’s largest family-controlled businesses performed over the previous decade compared to the S&P/TSX Composite Index.
The 30 businesses, part of the bank’s proprietary NBC Canadian Family Business Index, averaged an annualized total return of 11.3% between August 2005 and August 2015 — 570 basis points better than the S&P/TSX Index. On a cumulative basis, the bank’s index beat the broader market index by 120% — a significant thrashing.
Not on that list of family-controlled public companies was Kruger Inc., the private holding company for Montreal’s Kruger family, which is said to be the 61st wealthiest family in Canada at $1.8 billion.
While the family’s net worth has taken a bit of a hit in the past two years, it appears to once more to be trending higher thanks to its 83.9% ownership interest in Kruger Products L.P., the manufacturer of Canada’s number one tissue brands Cashmere, Scotties, and Sponge Towels, and others.
This is where income investors might want to pay attention.
In December 2012, Kruger Products L.P. sold eight million shares at $17.50 in an IPO via KP Tissue Inc. (TSX:KPT), whose sole business was its 15.7% ownership stake in the tissue products company; four years later, that stake has increased to 16.1%.
With the exception of KP Tissue’s first six months as a public company, its stock has traded below its IPO pricing, sinking as low as $9.81 per share, which is 44% less than what you would have paid in 2012 to get in on the offering.
The stock rebounded nicely in 2016 and is up 40.7% for the year. Income investors can do well by simply following this simple rule: buy whenever KPT dips below $14. Since going public, it’s done so on two occasions — the first time for four months between November 2015 and March 2016, and the second time for two months over this past summer — and it will surely dip below this level at some point in the future.
While its current market cap is only $142 million, that puts Kruger Products’ enterprise value at $1.3 billion, which includes $396.2 million in net long-term debt. For the first nine months through September 27, 2016, its adjusted EBITDA was $109.6 million — a 14.1% increase year over year. Its revenue grew 6% over the same period to $888.3 million. Extrapolate that growth over the entire fiscal 2016 and you get annual adjusted EBITDA of $144.2 million and $941.6 million in revenue.
South of the border, Kimberly Clark Corp. (NYSE:KMB), whose tissue brands include Cottonelle and Kleenex, trades at 12.1 enterprise value and 2.7 times sales. Apply those same multiples to Kruger Products L.P., and you get an enterprise value between $1.7 billion and $2.5 billion.
So, back out the net long-term debt of $396.2 million and average the two dollar amounts in the previous paragraph, and you get a market cap of $1.7 billion for the entire company and $269.8 million — almost double its current value.
Of course, we know that best-case scenarios never work out, but it gives you an idea of the potential value that lurks in this special-situation stock.
Most importantly, income investors get a 4.7% dividend yield for your troubles — 47% higher than Kimberly Clark.
