Aimia Inc. Cumulative Rate Reset Preferred Shares: AIM.PR.C

Release Date: 28/11/2016

As an inaugural post this blog will cover Aimia Inc. Cumulative Rate Reset Preferred Shares Series 3. They trade on the TSX under the ticker AIM.PR.C

Full Issue Details here

Both Aimia’s common stock and prefs have been under pressure for two years now and look incredibly cheap. As can be seen below they have been moving in lock step for most of that time. I have tracked this company for 6months now and given what looks to be a bottom in the preferred shares I have finally pulled the trigger and taken a substantial stake at 14.85 CAD.

AIM.PR.C in Orange, AIM in bar chart

Who are they?

Aimia is a loyalty program operator, the largest and more well-known being Aeroplan in Canada, they also operate owns and operates Nectar (The United Kingdom’s largest coalition loyalty program), Nectar Italia, and Air Miles Middle East, the leading coalition loyalty program in the UAE, Qatar and Bahrain, through a 60% ownership interest.

Valuation

The stock started to come under pressure in 2015 after top line gross billings and bottom line profits took a hit. This coming at the same time as plunging oil prices which affected not only Canadian equity valuations but also consumer spending trends.

Talk around the expiration of their large Air Canada contract in mid-2020 has also been weighing on the market valuation. The concern is less related to whether the contract gets renewed, but more related to whether Aimia will get less favorable terms in the renewal. As can be seen in the chart below, much of Aimia’s business is negotiated over long-term contracts.

When we value preferred shares we are interested in two metrics:

1. The preferred shares present and future yield
2. The underlying company’s capacity to make payments

Yield:

As of 28/11/2016 the shares yield a staggering 10.522%, moreover, the shares trade at an insane discount to par currently trading hands at 15.01 (A 40% discount to par). As per the terms of the issuance, Aimia’s yield resets at the 5 year government note yield + 4.20% once every 5 years, the first such reset is pegged to happen in March 31, 2019.

At current 5 year rates this would equate to a dividend reset rate of

(0.957%+ 4.2%) *25 = 1.28925

Which at current share prices equates to a 8.59% yield.

The best part about this yield is it will be a major beneficiary from the anticipated rise in long-term rates from now to 2019. We could easily see this yield at 11-12% if the long end of the curve continues to creep up and the shares stayed at current prices.

The Shares have massively under preformed the broad preferred share index CPD as can be seen in the chart below

But Can They Pay The Yield?

Aimia is a free cash flow machine. Their Adjusted EBITDA should finish the year at north of 220million. From that, the company will pay approx 60million in interest costs.

This leaves 160million in EBITDA.

Currently, the dividends on all three preferred issuances AIM.PR.A,AIM.PR.B,AIM.PR.C amount to only 16,986,374.

This gives the company an unheard of 9.4X EBITDA/pref dividend coverage.

As a reminder, by law if Aimia were to run into trouble they would have to cut they current massive 10% dividend on their common shares to 0 before they could even consider delaying preferred share payments.

Bottom Line

Aimia’s preferred shares are one of the highest yielding animals in the TSX’s preffered share zoo. On a risk adjusted basis, I consider these preffered shares to be the best value investment on the Toronto Stock Exchange. Even if the shares trade up to only $20 one year from now (still a 20% discount to par) that would still imply a 33.2% return + 10.5% yield giving an absolute return of 43.7%.

The Market is frequently irrational, in this case they are completely out to lunch, time to close!