Description

CanaDream, a Canadian microcap, is a leading Canadian RV rental company. The company promotes the opportunity to "experience Canada at your own pace". The stock caught our attention as it trades at 6x TTM EPS (C$0.66 stock with C$0.11 EPS).

OVERVIEW

CanaDream was formed in 1995 and went public in 1998. It has seven rental locations:  Calgary, Edmonton, Halifax, Montreal, Toronto, Vancouver, and Whitehorse. The company offers five types of RV: 3 campers and 2 motorhomes. In March 2015, the company made the small acquisition of Westcoast Mountain Campers - which has been around for 30 years and has locations in Vancouver and Calgary - for $1.53 million ($1.37 million in cash and $160k in stock).

CANADIAN RV MARKET

There are about 1.5 million RVs in Canada (about 14% of Canadian households). That compares with about 9 million RVs in the U.S. (about 8.5% of U.S. households). Average RV travel days are around 30 per year. Overall, about 22% of Canadians go camping each year (versus about 13% of Americans). There are about 3,000 campgrounds in Canada (versus about 16,000 in the U.S.).

Some long-term growth underpinnings:

1. Canada has 37 national parks and 8 national park reserves (compared with 59 national parks in America). Banff is Canada's oldest (1885) and most popular national park. For the year ending March 2015, 3.6 million people visited Banff, up 10+% from the typical 3.1-3.3 million visitors per year in 2008-2014. Total Canadian park attendance (across all 37 national parks) is now over 13 million a year. The national parks in America have been called "America's Best Idea" (2009 Ken Burns PBS documentary), and the national parks in Canada could be similarly called Canada's best idea. Canada will continue to expand its national park system. Interestingly, the national park idea has been gaining traction in other countries, even in China.

2. The aging population in North America is another long-term growth driver of Canadian RV rentals. About 10,000 Americans are turning 65 every day. By 2033, the number of older Americans will be about 77 million, versus 47 million today. Many of them are candidates for a Canadian RV experience (about half of RV users are 55+).

3. Another driver of the Canadian RV market is lower gas prices, which makes driving an RV more attractive relative to hotels.

4. Another factor promoting the Canadian RV market is the weak Canadian dollar versus US dollar and Euro. About 85% of RV renters in Canada are visitors from outside Canada.

COMPETITION

CanaDream, with about 800 RV units, is one of the largest RV renters in Canada, which has perhaps 6,000 total RV rental units. That implies that CanaDream has about 13% market share in Canada. CanaDream hosts about 20,000 guests a year in 7,000 bookings (about 3 people on average share a RV).  

Competitors include Compass (5 rental locations), Fraserway RV (5 rental locations), Real RV Value (7 rental locations), and Go West RV Centre (2 rental locations). Another large competitor is Cruise Canada (5 rental locations), which is part of Cruise America (the largest RV rental company in North America; Cruise America started in 1970 in the U.S. and has 130+ rental locations and 4,000+ RV units). By the way, most RV renters, like CanaDream, discourage one-way travel, imposing significant drop-off fees for one-way travel. CanaDream has a $750 (rising to $850 on April 1, 2016) one-way fee. The Canada geography and one-way fees mean that RV rental competition is almost entirely from within Canada.

The market is especially seasonal in Canada due to the colder weather with vast majority of rentals in the May-October window (company's 1st and 2nd fiscal quarters). In addition to managing the massive seasonality, barriers to entry include: insurance (e.g. CanaDream offers customers $5 million public liability and property damage insurance), financing arrangements for a RV fleet (CanaDream's cost of funds is under 4%), relationships with travel agents (85% of renters are from outside Canada!), economies of scale (e.g. vehicle maintenance, vehicle assistance line/service network, sales team, website/reservation system) and network effects like membership club programs (offering discounts on campgrounds, hotels, attractions, etc.).

VALUATION

What caught our attention was that the stock was trading at six times trailing earnings (C$0.66 stock with C$0.11 EPS; however, the EPS includes some one-time gains).

CanaDream has sales from guest rentals and from fleet sales. For F15 (April), guest sales (rentals) were C$18.7 million with EBIT of C$1.8 million. Meanwhile, fleet sales (sales of used RVs) were C$15.5 million with EBIT of C$1.5 million.

We see guest rentals as like a car rental company and fleet sales as like a (used) car dealership. Overall, free cash flow to the equity is running at EBIT of C$3.3 million, minus C$1.3 m interest and 26% taxes, which implies C$1.5 million, which is C$0.075 with 19.5 million FDS. D&A of the fleet runs at C$3.4 million a year (for the last two years). Fleet purchases were C$15.9 million in F15 (April), and fleet purchase commitments are for C$21.4 million in May/June 2015. Though there are no direct public comparables, public car rental companies Hertz (HTZ) and Avis (CAR) trade at 21.0x and 12.2x F15 EPS, respectively. Meanwhile, a basket of public car dealerships (Lithia Motors (LAD), America's Car-Mart (CRMT), Asbury Automotive (ABG), CarMax (KMX), Group 1 Automotive (GPI), Penske Automotive Group (PAG), Rush Enterprises (RUSHB) and Sonic Automotive (SAH)) trade on average at 14.2x F15 EPS. Taking a 14x multiple puts the stock around C$1.06, up +61% from here. The company doesn't have any forward guidance. However, with the recent acquisition and planned increase in fleet and solid long-term growth underpinnings, earnings should grow solidly over the next few years. CEO Brian Gronberg has been running the company since inception twenty years ago.

The asset replacement value also  appears to be well above the current share price. Assets of cash (C$6.9 million; conservatively ignoring AR, prepaid expenses and inventory), fleet inventory (C$5.6 million), guest fleet (C$21.5 million) and property/buildings/equipment (C$16.7 million; includes a new head office and 10.3 acres of land north of Calgary) is C$50.8 million. Liabilities of AP (C$3.2 million) and debt (C$31.0 million) is C$34.2 million. That implies an estimate for asset replacement value of C$16.5 million, or C$0.85 with 19.5 million FDS, up +29% from here. 

Catalyst

Trades at cheap multiple of cash flow, which is expected to grow

Recent acquisition and investment in fleet

Trades under asset replacement value

Solid long-term growth underpinnings for Canada RV rentals: Growing interest in Canada's national parks, growing retirement age population, lower gas prices, weak Canadian dollar