Description

Thesis: NWC is a Food & Merchandise retailer with zero competitors. They do ~$1.5bn a year in sales in Canada and the customer base is about to get $1.8bn in direct payments this year and $23bn in 2025/26. This is on top of $6bn and $20bn infrastructure spend programs that will provide economic tailwinds to the region well into the next decade. None of this is in Street numbers and the stock is dirt cheap trading at 6.5x EV/EBITDA, 12.5x P/E and pays a +4% dividend yield. This should be a +$50 stock.

Background: NWC is one of the oldest companies in Canada and was founded in 1664. It was spun-off from Hudson Bay as a public company in 1987. The company is a retailer specializing in remote and hard to reach regions. In F24 (Jan y/e) the company generated $2.5bn in sales and $318m EBITDA across 227 stores. Roughly 60% of Sales are from Northern Canada, 30% Alaska and 10% Caribbean.

Because of where NWC operates they are typically the only retailer in town. The company sells everything from apples to furniture to snowmobiles. They are the one-stop shop. Food is 70% of sales and Merchandise is 30%. Below is a map of NWC’s Canadian locations. The second map is Canada’s population density. NWC is in remote locations. These aren’t places that Amazon serves. Given the remote locations, NWC also owns its own airline and logistics network in order to serve its stores. It’s basically a distribution company wrapped as a retailer.

The opportunity: There are a number of large stimulus payments coming to NWC’s main operating regions in Canada. They are both indirect and direct payments. 

The first is an $8bn class action settlement from the Federal government for inferior water infrastructure and related health issues. The settlement is comprised of $1.8bn is direct payments to individuals and $6bn in infrastructure spending to build out a proper water network. The $1.8bn is a one-time payment and individuals will get $1300-2000/yr for every year they lived under a boil water advisory.  https://firstnationsdrinkingwater.ca/index.php/faqs/ 

The second program is a $23bn class action settlement from the Federal government for terrible child welfare policies in the region in the past. The settlement has been approved by the court but the final disbursement mechanisms still need to be certified. As a base, each impacted person will get a minimum of a $40,000 one time payment. https://fnchildclaims.ca/faq/

The third program is a $20bn program to reform Child and Family services in the area.

To put these programs into context, according to Statistics Canada he median income in the area is $32,000/yr

Fundamentals: Aside from stimulus being a giant catalyst, NWC is a very well run retailer. They have a captive customer base with little competition. Sales grow steadily every year as does EPS. ROE and ROIC are very healthy, this is a great compounder no one knows exists. Numbers should be ever higher except for there is limited reinvestment opportunity. You can only open so many stores and upgrade so much of your infrastructure in remote regions

Bottom line: Risk reward here is very compelling. The base biz is humming and trades at 6.5x EBITDA. That alone is too cheap. Add to that the massive tailwind of spending and there is upside to numbers. If NWC captures even just a small portion of the direct programs at 70% gross margin and no incremental G&A needed, that’s a lot of dollars flowing to the bottom line. Plus the years long infrastructure programs will bring economic activity, and with it spending, to the region. At $400m EBITDA ($80m increase from LTM on $26bn of direct stimulus seems conservative) and even if the multiple expands just to 7x this is a $50 stock. Historically this stock has traded 8.5x. At that multiple the numbers get silly and its a $50 stock on in-place numbers alone and +$60 if you assume the stimulus.

Catalyst

-ongoing execution

-stimulus payments