The 2nd Annual Series Outlining
Critical Accounting Issues In Each Sector Under Our Coverage
Why Accounting Matters Now More Than Ever
At Veritas, we pay close attention to accounting details and nuances as it helps us cut through the noise and focus on sustainable cash flow so that we can value a business properly.
Paying such close attention to the details also helps us identify warning signs or opportunity flags that the market hasn’t picked up on yet.
We believe accounting matters now more than ever because many of the checks and balances that have helped keep companies honest in the past are breaking down. As imperfect as they are, financial statements and company disclosures offer an early warning system so that you can avoid painful extreme losses.
Please read further as we’d like to share with you complimentary access to the Introduction of our 2nd Annual Vision 20/21 Series, which includes a “Guess the Company That Blew Up” game.
President and CEO
Head of Research
Enjoy Complimentary Access
A lot of smart people have said over the years that history is doomed to repeat if you don’t learn from it. As part of the introduction, we have collected five excerpts from five companies’ letters to shareholders over the past 20 years, changing a few details to keep each company anonymous.
See how many you can get right.
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complex financial reporting and valuation methodologies.
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accounting choices and the quality of governance to long-term shareholder returns.
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• Accounting Alerts • Monthly Accounting Vigils • Annual Vision 20/20 Series • Weekly Veritas Journal Newsletter • Fact-Finding Video Conference Series • Analyst Webinars
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Table of contents:
Chapter 2: Accounting Amps Up IPP Returns
Chapter 4: The Junk Premium: GFL
The Vision 20/21 Series
This report highlights the impact of IFRS 9 adoption on credit card performance at Canadian Tire, Loblaw, and the Big Six Canadian Banks before and after the pandemic.
Only by studying quarterly performance over the past three years can investors appreciate risk at each company during normal economic and extreme economic circumstances.
Few sectors can match capital structure complexity with Canada’s Independent Power Producers (IPPs). Our review of eight Canadian IPPs reveals that on average GAAP understates enterprise value by 18%, while sector EBITDA is overstated by 4%.
Taken together, our observations imply EV-to-EBITDA ratios can be overstated by more than 20%.
This report normalizes EV and EBITDA at Algonquin Power & Utilities Corp. (AQN), Boralex Inc. (BLX) Brookfield Renewable Partners LP (BEP_u), Capital Power Corporation (CPX), Innergex Renewable Energy Inc. (INE), Northland Power Inc. (NPI) TransAlta Renewables Inc. (RNW) and TransAlta Corporation (TA).
Chapter 3: Sometimes Operating Cash Flow Isn't All That It Seems
When evaluating a free cash flow, most investors start with operating cash flow (OCF) as reported on a company’s financial statements. Generally, a high and consistent level of OCF is a good sign of business health and sustainable cash generating ability.
But what if reported OCF isn’t actually generated from a company’s operations, but rather through other sources not directly tied to its core business? In this situation, a company’s operational health could appear better than it actually is.
We look at how Bombardier’s former transportation segment boosted consolidated OCF from changes in working capital that were more akin to financing sources rather than operationally generated.
Chapter 4: The Junk Premium: GFL
When GFL went public more than a year ago, it traded at a justifiable 6% discount to peers. However, the shares are up 63% since the IPO, the most in the sector. GFL’s TTM EV/EBITDA multiple now stands at nearly 19x, 66% higher than the 11x multiple it received at IPO, and an 11% premium to the North American sector average.
Unfortunately, investors relying upon service providers like Bloomberg and Eikon might still think GFL trades at a 4% to 6% discount to its peers. This reports dives into potentially misleading non-GAAP metrics.
REITs’ fair values have taken a hit due to the covid pandemic. However, the amounts written down have depended on tenant performance and, more crucially, management judgment on a litany of forward-looking factors, including rental rates and occupancies.
To test how subjective fair values are, we multiply the income-producing properties by the reported cap rate, and then compare them with the annualized reported Q4-F20 Net Operating Income. While not intended to determine if a valuation is ‘fair’, our analysis is useful for evaluating comparative risk in management valuation assumptions.
More coming soon.