Coast Wholesale Appliances CWA.UN

The Facts (as of October 29, 2010)

Unit price: $4.97. Book value per unit: $8.72. Market cap: $32 million (small). Distribution: $0.0416 per month or $0.50 per year. Current yield: 10%. AFTER conversion dividend (approximately 50% of annual net income): $0.42 per year. 2011 yield: 8.45%. Current P/E: 7.7x. Debt/equity ratio: 0.0 (no long-term debt) . Current payout ratio: 77%.

The Story

Coast is a leading independent supplier of major household appliances and accessories. Headquartered in Vancouver, British Columbia, Coast sells to developers and builders of multi-family and single-family housing, and to retail customers.

Coast’s sales are almost evenly divided between developer and builder customers, and retail customers. Coast currently operates 15 stores across the four western provinces and one store in the Greater Toronto Area of Ontario, as well as a network of warehouse distribution centres strategically situated to serve these locations.

The income trust was formed in 2005 and units were issued at $10.00, paying a distribution of $0.10 per month, for a 12% yield. The unit price soon dropped to $8.00 and traded in a range between $7.50 and $8.50 until January 2007. Over the next six months, the unit price grew to $11.00, before drifting back down to $6.00 by September 2008. In the market crash, the distribution was cut to $0.08 then $0.04 per month and the unit price cratered to $2.00 in April 2009. The distribution has remained constant at $0.04 since, and the unit price has grown back to $5.00.

Pros

The company has no long term debt, which makes it less risky. It currently trades at a low P/E and is very cheap relative to its book value. It offers a high yield given the present distribution policy and the new dividend policy has already been announced. The dividends should be sustainable and still allow some capital for growth. Management appears to be open and forthright.

Cons

This is a regional company with a small market cap. The shares are thinly traded, making it difficult to buy in volume (which may be a benefit to small individual investors). Profitability related to new houses and renovations, both of which have been affected by the recession. It may take some time for profitability to return.

Impression

This company appears to be relatively safe, offering a good investment for income. There may not be much potential for capital growth, unless profits and dividends increase. However, if the investor is satisfied with the 8.45% yield expected for 2011, the outcome should be fairly predictable.

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