Michael Smedley Grenville Strategic Royalty GRC-X SELL Jun 09, 2016

Someone phoned Market Call on April 26. It was trading at $.80, near its 52 week high. That night they released the Q4 results. The CEO abruptly resigned. Secondly they switched accounting methodology from IFRS39 to IFRS9, which had a very profound effect, as they hold a portfolio of approximately 30 investments. Under IFRS9, they essentially have to recognize Mark to Mark changes on the revenue line. Q4 numbers were less than $1 million, whereas in the previous 3 quarters, they had $11 million in revenue. Then announced that they were also changing their accounting methodology, just invested $5.8 million, and have to write that down by 50%. He immediately started selling his Stock. Thinks they are going to have cut the 12.6% dividend yield again.

Had a bit of an issue with their most recent earnings release, and had to do with the dividend payout ratio. It is calculated as a regular payout, but they also include a fake kind of sell part of their business, and count that under the earnings line into the payout ratio. Not reliable and not necessarily sustainable. He wouldn’t own this and rely on the dividend.

He owned it in the past. The market is concerned. The dividend is in the double digits. The market is concerned that they can sustain the dividend. They lost part of their management team. He is not looking at it. If he did it would be from a convertible debenture standpoint.

It is in the penalty box as they had a bad quarter after a CEO transition. He is looking for improvement in the sustainability of the dividend and some cost rationalization. It is a ship that is turning in the right direction. It may take another quarter or two. Wait for the next quarter.

(A Top Pick Sept 15/15. Down 36.26%.) This did not work out well. In May/16, there were a couple of red flags that came out. On the eve of their Q4 numbers, the CEO abruptly resigned. Also there was about a two-month delay in releasing results, compared to the previous year. Then there was a methodology change in their accounting. Finally, there was a change in business strategy. With all of those changes, he decided to exit.

They take their money and invest in partners, expecting 25% return. This kind of return has risk associated with it. He likes the idea but is not sure if it is suited for the public market when the public reacts too severely to one investment not working out. Right now their payout ratio is more than 100%.

They reported another crummy quarter last night, and the stock is getting obliterated. When it is down 30% on heavy volume, he thinks it is just somebody saying “get me the heck out”. He owns a small piece, and doesn’t know what to do. They are signalling a dividend cut. Has to think about this one.

You just have to shake your head at this one. For many, many months they were defending their dividend, saying that they were going to keep paying it. They ran into some problems so they cut the dividend, so management lost a lot of credibility. They’ve now turned it around and added 2 new partners, and are saying that for the next relationship they are going to share the risk. Think they need 3 or 4 quarters to prove their strategy is going to work and that they are going to grow again. He wouldn’t get involved right now.

Used to own this but hasn’t for a while. Prefers Alaris (AD-T), because of size. Had trouble with a few of their investments, so the stock sold off. If you are a value investor, it might be a time to look at something like this. He would rather wait for a turn or improvement on their numbers.

The problem here is about size. Investor audience is pretty limited and they previously canceled their dividend. It is a wait and see stock that needs many profitable quarters.