Wednesday, July 11, 2012

Enbridge Income Fund Holdings 2

On my comment blog is my comment on article about the Sad End of Investing (in ETFs). See comments blog.

I do not own Enbridge Income Fund Holdings (TSX-ENF). This company has reorganized and effectively changed from an income trust to a corporation. The problem is that they are mucking about with the accounting with this reorganization and there is not much in the way of continuity as far as I can see with the old accounting records.

There is a minimum of insider buying by a director. The insider trading report shows no insider selling. There are no stock options outstanding as far as I can see. There are some 17 institutions owning 17% of the outstanding shares. Over that past 3 months they have increased their shares by 3.5%. This is a positive.

The 5 year low, median and high Price/Earnings Ratios are 15.08, 18.25 and 21.43. The current P/E Ratios is 23.98 on a stock price of $23.50. This test shows a relatively high current stock price. I would also think that a P/E ratio of 23.98 on a utility stock is rather a high one.

I get a current Graham price of $21.50. The stock price of $23.50 is 9.25% higher that the Graham Price or has a Price/Graham price Ratio of 1.09. The 10 year low, median and high P/GP Ratios are 1.21, 1.43 and 1.66. This low P/GP Ratio suggest a good stock price. However, the Graham price doubled in value in 2011 because of the huge increase in book value. I would treat this test with caution.

The 10 year median Price/Book Value is 0.56. This is a rather low value as it implies that the stock price is almost half the book value. The current book value is 1.12. It is some 98% higher than the 10 year median P/B Ratio and therefore implies a rather high stock price. However, 1.12 is a rather good P/B Ratio. On the other hand, the book value has increased dramatically with the restructuring and so I would also treat this test with caution.

My last test and usually the most important one is the Dividend yield test. The 5 year median Dividend yield is 8.62% and the current Dividend yield is 5.26%. What you want to see is the current yield higher than the 5 year median to signal a good stock price. This does not do this. However, as with other companies changing from income trust to corporations, you would expect the dividend yield to go lower, usually, to between 4 and 5%. This company has done this.

The upshot of this this is that I do not think that any of my usual tests are remotely reliable. The Price/Earnings ratio does come the closes, if only other people agreed that this company earned $1.33 per share this year. There are, of course, other ratios I can use, but here again there are lots of "howevers".

I do not see that the Price/Cash Flow Ratio will help as the Cash Flow reported for 2011 is a lot lower than that for 2010. Also, no analyst seems to be giving out cash flow estimates anymore and there is no company guidance on this. The Price/Distributable Income is no help as other sites give Distributable Incomes other than what the company is giving and they are all much lower than what the company is giving. (There can be various ways of calculating the Distributable Income.)

The only values that seem to have some continuity are the Revenue figures. I get 10 year low, median and high Price/Sales per Share Ratios of 1.36, 1.72 and 2.05. The current P/S Ratio is 3.24. As with a lot of Ratios, a lower one is better. In this case, the current P/S Ratios is much higher than the 10 year median high P/S Ratio of 2.05. This test suggests a relatively high stock price.

When I look at analysts, recommendations I find a lot of Hold recommendations. There is also some Underperform and Sell recommendations. The consensus recommendation would be a Hold. The 12 month consensus stock price target is $22.20. This implies a capital loss of 5.23% and with a dividend yield of 5.57%, an investor would basically break even.

One analysts giving a Hold rating and a 12 months stock price of $25.00 says that the company has a very attractive dividend yield. This would imply a capital gain of 6.38% and with a dividend yield of 5.57 would give a total return of 11.95%.

DBRS (Dominion Bond Rating Service) gives this company a stability rating of BBB (high). This would mean that the company is a good credit risk.

I haven,t changed my mind on this company. I do not like it when everywhere you look someone else has a different idea what the EPS is. I do like it that it that there seems to be a lack of continuity in the account for this company. I do not like that fact that the company seems to have a book value of $20.98, but that their investment is only in a fund which shows a negative book value.

There are obviously lots I do not understand about the accounting for this company. I therefore would not invest in this company because there seems to be lots I do not understand about it.

Enbridge Income Fund Holdings Inc. is a publicly traded corporation. The Company, through its investment in Enbridge Income Fund, holds high quality, low risk energy infrastructure assets. The Fund's assets include a 50% interest in the Canadian segment of the Alliance Pipeline, a 100% interest in the various pipelines comprising the Saskatchewan System, and interests in more than 400 megawatts of renewable and alternative power generation capacity. Its web site is here Enbridge Income. See my spreadsheet at enf.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

1 comment:

  1. Informative analysis. I agree with your conclusions as well. If you can't understand the economics of a business after a good go on SEDAR than best to avoid.

    In the past I have phoned CFOs and have had decent chats about the direction of the business and the debt load, balance sheet etc. Another way to get more info.