Anodyne Inc.

Perpetually unloved fund holding Dominion Citrus Income Fund (DOM.UN) suspended its monthly distribution today, effective January 2008, and plans to convert from an income trust back to a regular corporate structure by mid-2008. The unit price will likely tank tomorrow morning, and remain tanked for the near term.

I will acquire additional units tomorrow, at whatever irrational price the market serves up. My thinking is as follows:

1. I estimate DOM.UN's liquidation value at between .28-.39/unit. This is what unitholders would receive if the company closed down, blew off all the assets, and distributed the proceeds to the owners. But DOM.UN isn't closing down. It's a viable business that has repeatedly generated earnings of .08-.10/unit. 2007's earnings look worse than this medium-to-long-term average, because of a massive goodwill writedown in the second quarter. But a goodwill impairment (an accounting term) does not neccessarily indicate an economic impairment of the business' operating results. Dominion didn't invest in a new warehouse, new packaging equipment, new climate control facilities, etc. because its managers think it's going out of business any time soon. The company's intensive capex ("capital expenditures") is a signal that the business is relatively healthy and growing.

2. DOM.UN has been squeezed by its biggest customers: major grocery chains in Ontario and Quebec. The company has reasonably responded by shifting its business model away from supplying carrots, potatoes, and the like, and toward manufacturing and distributing higher-margin products ("fresh-cut" fruit and veggies, smoothies, etc.) for which there are fewer available substitutes, and less customer sensitivity to margins.

3. DOM.UN is an attractive buy for anyone with a patient, rational 3-5 year investment horizon. Do the math. At .08/unit earnings, and a (conservative) .50 unit price, it's trading at a PE of 6.25. If the units really tank tomorrow -- say, to .40 -- the PE could drop as low as 5. Most food retailers trade for a PE of 10-12, which in DOM.UN's case would imply value of .80-.96 unit, instead of an "irrational" current market value of .50 or lower.
- posted by cjb @ 6:50 PM