Dundee Bancorp DBCA.to
December 03, 2003 - 1:55pm EST by
2003 2004
Price: 20.50 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 521 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Dundee Bancorp (listed on the Toronto Stock Exchange - symbol: DBC.A)

Though I am finding it very difficult to find lots of value in the current market (the VIC bargain meter is also registering the same reading, if I understand the bargain meter properly), Dundee Bancorp stands out as an interesting undervalued asset play and long-term value creation investment.

Dundee Bancorp is a Canadian holding company whose main interests are in financial services, real estate and natural resources. The stock trades at approximately a 41% discount to Net Asset Value (NAV). There are essentially 2 ways that the discount can narrow/disappear:

- the market at some point will realize that a large part of Dundee’s investments are public and as such there is less valuation risk in each of the investments as compared to the past and consequently the valuation will rise, or

- management could monetize its various investments/dividend them out to shareholders. If management monetizes the different investments, it can use the cash to buyback undervalued stock and/or dividend cash out to shareholders.

Net Asset Value Calculation

Stock Net Asset NAV/
Shareholdings Price Value(C$mm) share(C$)
Dundee Wealth
Common Shares 47.7 mm $7.80 $372 $14.65
Preference Shares 55 2.17
Loan 23 0.91
$450 $17.73

Investment Portfolio
Glencairn Resources 8.7 mm $1.07 9 0.35
Breakwater Resources 51.9 mm 0.67 35 1.38
Dundee REIT 6.1 mm 23.15 141 5.55
Other Equity Acctd
Investments 7 0.28
Marketable Securities (at market value) 35 1.38
Other Porfolio Investments (at mkt val) 211 8.31
438 17.25

Other Assets 150 5.91

Net Cash / (Debt) (160) (6.30)

Net Asset Value $878 $34.59

Notes to NAV Calculation

Marketable Securities and Other Porfolio Investments are at the market values as at September 30, 2003. Marketable Securities can be invested in Dundee’s own mutual funds, closed-end funds or in other investments. Other Portfolio Investments probably still includes 2 million shares of the Laurentian Bank (LB.to) (market value at September 30, 2003 of $53.4 mm and market value today of $56.3 mm) and 10.3 million shares of IAMGold (IMG.to) (market value at September 30, 2003 of $86 mm and market value today of $108.3 mm). However since management does not provide updates on these holdings since they own less than 10%, they have been left under Other Portfolio Investments and not separated out. The current market values of the Laurentian and IAMGold stakes adds another $1 to the NAV calculation (not included above).

Other Assets represents other real estate investments as well as investments in oil & gas properties.

The above analysis does not include potential taxes on the sale of any investments. I have assumed that the NAV discount won’t go below 20% to account for this (see below under Investment Scenarios).

Description of the Major Holdings

Because the majority of the gross asset value resides in Dundee Wealth, I will provide a brief overview of Dundee Wealth as well as Dundee REIT.

Dundee Wealth

Dundee Wealth Management operates in 2 main areas – investment management and advisory services/capital markets. Dundee Bancorp owns 83.8% of Dundee Wealth Management (DW.T), which in turn owns 81.7% of DWM Inc. through which the investment management and advisory services operations are conducted. The remainder (18.3%) of DWM Inc. is owned by CDP Capital – Financial Services, a subsidiary of the Caisse de Depot et Placement du Quebec (the Pension Plan that operates in the province of Quebec).

The investment management operations of Dundee Wealth consist of the following:
a) Management of mutual funds branded under the names of Dynamic, Commonwealth and Hathaway
b) Management of third-party mutual and segregated funds
c) Management of private client accounts through Goodman Private Wealth Management
d) Management of numerous closed-end funds including Dundee Precious Metals and DiversiTrust Income Fund Units

The investment management operations generated $19.2 million in EBITDA (represents roughly 90% of the EBITDA for all of Dundee Wealth) for the quarter ended September 30, 2003. These operations had $9.6 billion in Assets Under Management (AUM) as at September 30, 2003.

The advisory services/capital markets operations are structured as follows:
a) Dundee Securities – a full service, IDA-registered, investment dealer with 223 retail brokers and 75 professionals servicing its capital market function (research, institutional sales and trading and investment banking)
b) Dundee Private Investors – a mutual fund dealer with 259 advisors
c) Dundee Insurance Agency and Dundee Mortgage Services – provides other products and services to Dundee’s clients in partnership with other financial institutions.

The advisory services/capital markets operations served a client base of over 200,000 accounts representing $9.4 billion in AUA (Assets Under Administration) as at September 30, 2003. This division generated $2.1 million in EBITDA (approximately 10% of the EBITDA for all of Dundee Wealth) for the quarter ended September 30, 2003.

In terms of valuation, Dundee Wealth trades at a P/E of 18.6x (based on 2004 estimated earnings), 6.33% of Q3 AUM and 7.1x Q3 annualized EBITDA. Overall, Dundee Wealth trades at the lower end of its peer group in terms of valuation.

Dundee REIT

Dundee REIT (D.UN on TSE) owns a portfolio of office, industrial and shopping centre properties. Their strategy is to focus on well-located Class B commercial properties that offer reliable current income as well as opportunities for income and value growth. The REIT has identified 5 major Canadian cities as its core markets: Toronto, Montreal, Ottawa, Calgary and Edmonton.

In terms of valuation, Dundee REIT trades at a 9.5% yield and a price/AFFO of 11.3x.

In general, I would consider both Dundee Wealth and Dundee REIT to be roughly fairly valued (they are probably at the lower end to middle of the fair value range) meaning that there will not be a large valuation/NAV pick-up from these 2 investments, other than through intrinsic value growth.

Control / Ownership Structure

Dundee Bancorp is controlled by its founder, Ned Goodman. His family in total (including his own shareholdings) owns 17.3% of the publicly traded subordinated voting shares and almost all of the common shares. Since each common share has 100 votes and each subordinate voting share has only one vote, the Goodman family has 82% of the votes at Dundee. Ned Goodman personally has about 69% of the voting control at Dundee.

Major Shareholders

Other than the Goodman family, shareholders include Private Capital Management (Bruce Sherman) which owns approximately 23% of the subordinate voting shares and AIC Limited which owns 20% of the subordinate voting shares. Including the Goodman family’s 17% stake in the subordinate voting shares, the top 3 shareholders control 60% of the subordinate voting shares.

Investment Case

Assume the following 5-year investment scenarios:

1) Dundee has traded at an average discount of 44% to NAV since 1997. So, given the current discount of 41%, it is trading in roughly the same range. Assuming Dundee doesn’t grow NAV, this investment is dead money for the next five years. Please note that the widest discount that Dundee has ever traded at was in the mid-50% range to NAV (during the tech hey days in early 2000), so the downside is limited (assuming no deterioration in NAV). Assuming the NAV discount went to 55%, the stock would trade around $15.50, a decline of just over $5 from the current stock price (24% decline). Given the fact that most of Dundee Bancorp’s investments are now in public companies versus the past, it is unlikely the NAV discount would get that wide.
2) Dundee has traded as low as a 20% discount to NAV (assume that the NAV discount won’t get any lower due to potential taxes on the various investment stakes). Given the fact the majority of its asset value is now publicly traded (much less was publicly traded in the past), there is a high likelihood of the discount narrowing and this scenario taking place. This would result in average annual returns of 6% per annum.

Please note that scenarios 1 and 2 do not include any increases to NAV or tax-free dividends of the investment stakes to shareholders. If we assume 5% annual NAV growth over the next 5 years, then one can expect average annual returns of 5% in scenario 1 and over 11% in scenario 2. Obviously, the returns will be higher if the discount narrows faster than over 5 years or NAV increases faster than the assumed rate.

Also, Ned Goodman is an experienced natural resources investor and this investment offers that future natural resource/commodity upside potential for those who want that exposure in a value investment.


1) Because of the voting structure at Dundee, an investor has very little say in the company’s affairs. Historically, however, Dundee has made very profitable investments. Because of the voting control structure, it is unlikely that the NAV discount will disappear in its entirety.
2) The management at Dundee maintains a very long-term perspective on value creation, so the investment can be frustrating for investors with shorter-term horizons.
3) The stock is illiquid.
4) Ned Goodman is 63 years old and he makes the final capital allocation decisions, so there is succession risk despite the fact that each of the operating companies has independent and experienced management.


Dundee Bancorp is an undervalued asset play with low downside risk. Management has historically handled their capital allocation responsibilities very well. Given the fact that most of Dundee Bancorp’s investments are now public, there is a high likelihood of the NAV discount narrowing. Even if the market is slow to narrow the NAV discount, management can monetize/dividend out its public equity stakes, buy back stock and make NAV enhancing investments, all of which should cause the NAV discount to narrow and NAV to increase.


- market realization that most of Dundee Bancorp’s investments are now public, sale of investments stakes, dividend out investment stakes directly to shareholders, stock buybacks
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