Scully Royalty Ltd. current report, Q2 FY2017

Business Context and Reporting Period

Company: MFC Bancorp Ltd. (Note: Input metadata referenced "Scully Royalty Ltd.", but the filing text identifies the registrant as MFC Bancorp Ltd.)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2017
Filing Date: May 15, 2017
Business Overview: MFC Bancorp is a merchant bank providing financial services and structured trade solutions, with a focus on small and medium-sized enterprises. The company operates in two segments: Merchant Banking and All Other (primarily medical equipment). The company is currently executing a strategy to exit unsatisfactory product lines, deleverage, and reallocate capital to its merchant banking business.

Key Financial Metrics

Metric Q1 2017 Q1 2016 (Re-presented) Dec 31, 2016
Gross Revenues $110.6 million $357.6 million N/A
Net Loss (Attributable to Shareholders) ($2.1 million) ($0.1 million) N/A
Operating EBITDA (Non-IFRS) $5.7 million $9.4 million N/A
Cash and Cash Equivalents $61.3 million N/A $120.7 million
Total Debt $80.3 million N/A $116.8 million
Shareholders' Equity $319.7 million N/A $327.5 million
Current Ratio 2.31 N/A 1.87
Long-term Debt-to-Equity 0.20 N/A 0.25

Note: All figures are in Canadian dollars unless otherwise specified. Q1 2016 figures have been re-presented to reclassify mining and hydrocarbon properties to continuing operations.

Material Changes vs. Prior Period

  • Revenue Decline: Gross revenues decreased 69% to $110.6 million from $357.6 million in Q1 2016. This was primarily due to the sale of non-core subsidiaries (including a Latin America-focused commodities trading business), the exit of certain product lines/geographies, and a strengthening Canadian dollar against the Euro.
  • Net Loss: The company reported a net loss of $2.1 million ($0.03 per share) compared to a net loss of $0.1 million in Q1 2016. The loss was driven by lower revenues and a net foreign currency transaction loss of $1.0 million (compared to a gain of $3.6 million in the prior year).
  • Deleveraging: Total debt was reduced by 31% to $80.3 million from $116.8 million at year-end 2016. Short-term bank borrowings decreased by 29% to $67.4 million.
  • Inventory Rationalization: Inventories were reduced by 37% to $20.2 million from $32.0 million at year-end 2016 as part of the strategy to exit underperforming lines.
  • Cash Flow: Operating activities used $20.5 million in cash, a reversal from the $104.1 million provided in Q1 2016. This was largely due to a $34.0 million reduction in short-term bank borrowings.

Guidance, Outlook, and Risks

Proposed Plan of Arrangement

On March 31, 2017, the company announced a proposed plan of arrangement to restructure its corporate form. Key elements include:

  • Reduction of shareholders' capital by the amount of the retained deficit.
  • Consolidation and split of common shares.
  • Exchange of existing shares for shares of a new parent company ("New MFC") incorporated in the Cayman Islands.
  • Expected Completion: Late second quarter or early third quarter of 2017, subject to court, shareholder, and board approvals.
  • Rationale: To achieve fiscal flexibility (Cayman Islands has no corporate income tax), reduce administrative expenses, and facilitate future strategic transactions.
  • Outlook

    Management intends to expand merchant banking activities and believes the strategic reallocation of capital and the proposed Plan will reduce expenses and improve returns on equity.

    Risks and Contingencies

    • Credit Risk: Significant exposure to a former customer in the wood products market that filed for insolvency in February 2016. Net trade receivables from this group were $100.5 million as of March 31, 2017. Recoverability depends on legal processes and collateral.
    • Currency Risk: Substantial operations are denominated in Euros. A strengthening Canadian dollar negatively impacts reported revenues and assets.
    • Forward-Looking Statements: Actual results may differ materially due to global economic conditions, commodity price volatility, and the ability to complete the Plan of Arrangement.

    Investor Verification Checklist

    • Receivable Recoverability: Verify the status of the $100.5 million receivable from the insolvent wood products customer and the adequacy of collateral.
    • Plan of Arrangement Approval: Monitor progress on court and shareholder approvals for the Cayman Islands restructuring and capital reduction.
    • Revenue Sustainability: Assess whether the 69% revenue decline is a one-time structural change or indicative of ongoing market contraction in the merchant banking segment.
    • Currency Exposure: Evaluate the impact of CAD/EUR exchange rate fluctuations on future earnings, given the significant Euro-denominated operations.
    • Debt Maturities: Review the schedule of long-term debt maturities to ensure liquidity is sufficient to meet obligations without refinancing risk.