Description

Gendis trades on the Toronto stock exchange with 16.13 million shares outstanding (there are only 62,000 outstanding options which are well out of the money).

Gendis was a holding company that has been liquidating or spinning off its assets for the past couple of years. Although it is now focused on growing it’s retail business there are still several valuable assets in addition to the retail store chain including owned real estate, a potential income tax recovery and cash/cash equivalents. My investment thesis is that the sum of the parts is worth more than twice the current share price and that eventually the share price will reflect both the company asset value and earnings power.

The primary assets that are still owned by the company include:

1. Retail store chain
The retail store chain of 240 SAAN/Red Apple stores sells junior department and family clothing and footwear. The stores are typically located in small, rural Canadian towns. The chain went through a tough time a couple of years ago but is now back to profitability. Gendis had this chain up for sale 1-2 years ago but the bids it received were rejected by the board. The company is revitalizing its retail segment and has developed some new concepts which are being implemented this year including up to 8 larger stores that sell more upscale (relative to the typical SAAN store) merchandise and are located in high traffic areas typically around big box type stores. The first of these stores just opened in April in British Columbia.

The book value of the retail segment is about $48 million. The retail stores had an operating profit of $5.7 million in FY02 and FY03 should be at or above this level.

2. Real Estate. The company owns various real estate properties of which probably 60% would be sold if the company was offered market value. The company owns its main distribution center which I don’t think it would sell. Approximately 90% of the leaseable area of the properties are in support of SAAN retail operations.

Book value for Gendis’s real estate is about $15.4 million which is also a reasonable estimate of current market value.

3. Cash and Cash equivalents
The company has cash of $25.2 million ($1.56/share) – I’ve included the company’s $6 million investment in here because the company is short an option on the investment which currently has a public market value of $8.75 million and expires July 9, 2003 (ie. the option holder will be exercising their option before this date).

Estimated minimum net asset value = $48 + $15.4 + $25.2 = $88.5 million
With 16.1 million shares outstanding, the NAV is $5.49/share.

The above calculated NAV of $88.5 million differs from the balance sheet book value of $121 million ($7.54/share ) because I have not included the accrued pension asset of $4.4 million nor the potential income tax recovery of $28.4 million. So strictly based on my relatively conservative NAV of $5.49/share, its shares are trading at 45% of NAV.

There are also a couple of potential other bonuses the largest of which is the potential of a favourable court ruling on an income tax dispute. The company was reassessed income tax in 2001 by the Canada Customs and Revenue Agency for a transaction it concluded in 1995. Gendis has paid the tax owing of $28.4 million which it is however disputing and therefore is carrying on its balance sheet as an asset. Preliminary court proceedings have taken place and it appears that the courts agree that there is a potential case and so the case is likely to be heard in October. I view this as a potential bonus of up to $28.4 million or $1.76/share.

The company also has significant tax loss carryforwards which will probably eliminate it paying any income tax for the next few years. There are additional tax loss carryforwards that are not on its balance which could be used by a potential acquirer or if the company is more profitable in the near future than it is currently projecting.

The company announced in Dec 2001 a share buyback program for 5% of the company’s shares which it completed by the end of March 2002. It must wait until Dec. 2002 before it is able to renew its normal course issuer bid – which I expect it will do. The company’s largest shareholder (29%) who is also the president and CEO was buying shares before the sharebuyback at up to $2.13/share.

In a worst case liquidation scenario, which I think is very unlikely, the minimum liquidation value I estimate as:

Cash and Cash equivalents: $25.2
Real Estate net @ 90% of BV: $14 million
SAAN Stores @ 40% of BV: $19.2 million
Less: lease and other off balance sheet commitments: ($21 million)
Net minimum liquidation value: $37.4 million or $2.32/share.

This is not including the potential tax refund of $28.4 million or $1.76/share or pension asset of $4.4 million.

In summary I think there is little long term downside risk and great upside potential based on the current market value.

Catalyst

1. A special cash dividend to the shareholders.
2. Sale of the retail store division at a favourable price.
3. Increased visibility and profitability of the retail store segment.
4. A renewed share buyback program.
5. A favourable ruling by Canada Customs and Revenue Agency which would return all or part of $28.4 million in cash to the company.
6. Elimination of the holding company discount since the company is now more of a pure play.
7. Coverage by a brokerage research analyst – the company is currently not followed by any brokerage.