Manager Insight

Galibier's Joseph Sirdevan takes multi-year view.
By Michael Ryval | 31/08/17

Because the Canadian small-cap universe is comprised of more than 400 companies, it's hard to generalize about whether the market has become expensive after a multi-year run-up. Rather it makes more sense to look at the market as a collection of individual stocks, says Joseph Sirdevan, chief investment officer at Toronto-based Galibier Capital Management Ltd., and lead manager of the $49-million Steadyhand Small-Cap Equity.

About the Author
Michael Ryval, a regular contributor to Morningstar, is a Toronto-based freelance writer who specializes in business and investing.

"We tend to look at the market on a stock-by-stock basis. As they say, it's a market of stocks, not a stock market," says Sirdevan, a 25-year industry veteran who co-founded Galibier in 2012 after a lengthy stint at value manager Jarislowsky Fraser. "There are some things that are wildly overvalued and some things that are cheap. And we are finding things to buy. We have a very defined investment philosophy and process."

After having assumed the fund in August 2016 from Montreal-based Wutherich & Co. Investment Counsel Inc., Galibier has extensively overhauled the portfolio. Steadyhand Small-Cap Equity is one of the firm's four mandates that in aggregate amount to about $750 million. "We use the same valuation process in all our products," says Sirdevan, adding that the firm invests in fewer than 60 companies across all its investment products.

Sirdevan, who heads a six-person investment firm, looks for companies that have five attributes: a quality management team with environment and social governance practices, high free cash flow, enduring and sustainable competitive advantage, above-average long-term growth prospects and, finally, an appropriate level of financial leverage. However, quality of management and competitive advantage rank at the top of the list.

"The second step of our process is to project three to five years into the future the company's earnings, cash flow and balance-sheet structure," Sirdevan says. "We assign a valuation to how we think the market will value the stock in three years."

Take, for instance, Brick Brewing Co. Ltd. (BRB), an independent brewer best known for brands such as Laker, Waterloo and Landshark. Based on the expectation that the company will earn 27 to 30 cents a share in 2021, and combined with the cash the firm will generate in the next four years, the team believes the shares have a fair value of about $4.05.

"We actually bought it well below that level," says Sirdevan of the stock, which was trading this week at about $3.90. "That's exactly the kind of math that we employ for all of our holdings. We are always looking for where we believe value lies, and we try to quantify that and use a relatively high discount rate to calculate our view on fair value. It's a conservative approach."

That conservatism is reflected in the portfolio of 22 companies chosen by Galibier, which is named after the Col du Galibier, or one of the most difficult mountain passes in the Tour de France bicycle race. "We will own no more than 25 names, and of that no more that 30% will be non-Canadian," says Sirdevan. He noted that the fund has only about 10% in the U.S. since he considers most U.S. small-caps to be pricier than in Canada.

Also representative of the fund is New Flyer Industries Inc. (NFI), the largest North American manufacturer of buses. "It has 50% market share and bus manufacturing is a very defined industry, in terms of demand. Buses wear out in 12 years and have to be replaced," Sirdevan says. "New Flyer has the ability to offer a complete range of technical elements that clients may demand."

The team estimates that by 2021 the company will generate US$4.50 per share in free cash flow (New Flyer reports earnings in U.S. dollars). "If we assume a 15% discount rate, that gets us to an intrinsic value of $55. So we still see some good upside," says Sirdevan. New Flyer was trading this week at around $50.50.

Another favourite is Spin Master Corp. (TOY), a mid-sized player in the North American toy industry. "It's demonstrated superb execution. We thought they were very attractively valued based on its Paw Patrol television series and all of the spin-off toys associated with the franchise," says Sirdevan.

"Spin Master is viewed as a very innovative company, compared to larger players like  Mattel (MAT) which is stuck with some of its brands," he adds. "It's hard for Mattel to grow its top line, but Spin Master, being a distant number three, has the ability to grow." Acquired at $32, the stock was trading this week at about $45.50. But based on Spin Master's earnings power, Sirdevan believes its intrinsic value is $55-$60.

One of Sirdevan's holdings that has yet to pay off for the fund is Intertape Polymer Group Inc. (ITP), a maker of industrial tapes and adhesives regarded as a distant number two to industry leader  3M Co. (MMM). "Intertape has been broadening out its geographic base, and lowering its cost base by making a large acquisition in India, for example," says Sirdevan. "And it's leveraging its distribution."

Intertape stock was trading at $19.25 this week, down from $25 in mid-July. But Sirdevan is prepared to wait for the stock to reach its intrinsic value. "We see a higher share price due to changes in the product mix to higher-margin products, reducing manufacturing costs and some organic acquisitions."

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