Thursday, January 31, 2013

Valener Inc

I do not own this stock of Valener Inc. (TSX-VNR, OTC- VNRCF). I had originally been following this stock as Gaz Metro. Gas Metro LP (TSX-GZM.UN) had floated some 29% of its shares on the TSX. Now, it has made a company out of the 29% that was floated on the TSX. This makes for some confusing accounting. I worry that the accounting for Valener may not reflect the true state of what it owns. My spreadsheet follows the company from Gas Metro to Valener Inc.

First of all let me say that I do not believe that they can afford their dividends. There was a decrease in 2011. This is not the first decrease in dividends for this company. The last increase in dividends was in 2004 and it was for 1.5%. They cannot afford the dividend in 2012 with DPR rates at 122% for earnings and 97% for cash flow. This is not expected to get better this year or next.

Dividends hit a high in 2004 and been tracking down ever since. The 5 and 10 year dividends have declined by 4.2% and 2.4% per year. (Do not forget that I use compounding in my growth calculations. Compounding can do wonderful things when we are talking about growth. It is just as powerful when we are talking about decline.)

Looking at total return, to the end of 2012, the company does not seem to be doing that badly, until you take a closer look. The total return over the past 5 and 10 years is 6.75% and 5.39%. However, the portion attributable to dividends is at 7.11% and 7.4% per year over these periods. There was a capital loss of 0.36% and 1.65% per year over these periods. This means that while shareholders got income, they lost capital. (Also, they cannot afford the dividends.)

When I look at growth, there is none in revenue, EPS or cash flow. There seems to be some good growth in book value per share. Outstanding shares have grown at the rate of 1.5% and 1.6% per year over the past 5 and 10 years. They have issued stock and preferred shares and this seems to be to pay down debt.

This company depends on how well Gaz Metro is doing because it owns part of Gaz Metro. If you look at the Debt Ratio for Valener they look wonderful at 8.52 for the financial year ending in September 30, 2012. However, if you look at the books on Gaz Metro, their Debt Ratio is 1.35 for the financial year ending in September 2012. A Debt Ratio of 1.35 is a low ratio.

The Return on Equity for this company is low at 5.1% and the ROE on comprehensive income is even lower (60% lower) at 2%. The ROE on Gaz Metro is still good. However, Gaz Metro has the same problem with the comprehensive income ROE as it is significantly lower.

So far we got a warning message with the DPRs, we got a warning message with the Debt Ratios (for Gaz) and we got a warning message with variance of ROE on net income and comprehensive income. (This last warning says that earnings may not be of good quality.)

Wait there is more. We get a warning via the Accrual Ratio. The Accrual Ratio has always been high. If the Accrual is positive and high, it might mean that the company is hiding some problem. It also might mean that the Cash Flow is not as good as it appears. It could also indicate that the company is bulking up its earnings with non-cash items. None of this is good.

So what do the analysts say? The analysts' recommendations are a Buy and some Holds. The consensus recommendation would be a Hold. The 12 month consensus stock price is $16.80. This implies a total return of 11.32% with 6.25% from dividends and 5.07% from capital gains.

As far as stock price goes, the Price/Earnings Ratio and the dividend yield tests say the stock price is high. (The 5 year high median P/E Ratio is 12.95 and the current P/E Ratio is 19.50 based on $15.99 stock price and $0.82 EPS for 2013.) The Price/Graham Price Ratio test and the Price/Book Value per Share price say the stock is cheap.

Who do you believe on price? Frankly, I do not care. This stock has much in the way of warnings. I do not think that risk and reward is in balance. I see high risk, low reward. There are a lot of great stocks in our market, so why bother with this one.

Valener owns 29% of Gaz Metro and also has investments (i.e. Vermont Gas Systems & Green Mountain Power). Gaz Metro is Quebec's leading natural gas distributor. Its web site is here Valener. See my spreadsheet at vnr.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 or StockTwits.

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