An improved bottom line and an optimistic outlook for 2004 haven’t been enough to keep Saskatchewan Wheat Pool’s share price from sliding in recent weeks.
Last week, the pool’s Class B common shares were trading on the Toronto Stock Exchange at around 38 cents, down from 46 cents in January.
One stock market expert says the stock will continue to languish as long as a cap limiting ownership of the company’s common shares remains in place.
The 10 percent cap prevents big institutional investors from buying pool shares, meaning there is no one in the market able or willing to trade big blocks of shares.
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“Because nobody can buy it, nobody cares about SWP stock,” said Greg Boland, a Toronto-based money manager whose clients own a sizable chunk of the pool’s publicly traded shares.
“It sits out there on its own as an orphan.”
With roughly 222 million common shares in circulation, the 10 percent limit works out to about 22 million shares. Based on the current stock price of 38 cents, that works out to a maximum investment of about $8.4 million.
“A guy running an Alberta Treasury pension fund who has billions to invest is not going to waste his time on a few million dollars investment,” said Boland. “He needs to be able to buy more.”
During a March 24 conference call with media and investors, Sask Pool chief executive officer Mayo Schmidt said the company’s strategic planning committee has been reviewing the impact of the cap but no decision has been made.
He acknowledged that its removal would encourage additional institutional investment.
“Certainly the board of directors recognizes the value that institutional ownership and liquidity would provide if the cap was changed, so we do continue to consider this an issue,” he said.
Boland said he was encouraged by Schmidt’s remarks, which seem to indicate the pool is moving in the direction of eliminating or raising the cap.
“I think this went very much further than his previous comments,” he said.
When pool shares were climbing to more than $20 in the late 1990s, a number of major investment dealers and analysts followed the stock closely and issued regular reports advising investors to buy.
That’s no longer the case, as no investment dealer tracks the pool. By contrast a number of dealers follow Agricore United, which creates more interest and gives that company a competitive edge among investors.
Boland said that under the right conditions, including removal of the cap, pool shares could be worth as much as 65 cents.
“But it’s not going to get there without bringing it to people’s attention and allowing them to buy it,” he said.
Schmidt said he thinks pool stock has performed well given that new shares are regularly being put on the market through the conversion of convertible subordinate notes issued under the pool’s financial restructuring plan last year.
Under a deal reached with bondholders at that time, $255 million worth of bonds are convertible at a rate equivalent to roughly 45 cents per share.
During the 12-month period ending Jan. 31, 2004, $68.5 million of notes were converted into 153,000 new Class B shares.
“It seems that the share price is very resilient in the face of substantial conversions,” said Schmidt.
“I think that speaks strongly to the support we are receiving on the equity side of the business from the marketplace.”
Boland said the low share price and lack of investor interest creates serious competitive problems for the pool in terms of access to capital.
If Agricore United needed to raise $100 million to buy elevators, invest in new equipment or pay down debt, it could easily do so through a stock issue. Sask Pool can’t.
“It’s a competitive disadvantage if their capital costs more than anybody else’s and if they want to do a capital expenditure program,” he said.
“It’s a big problem in the long run and I think they recognize that.”
