CUNDILL VALUE & CUNDILL SECURITY FUND'S
PETER CUNDILL & TIM MCELVAINE
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OID: What are you finding that's compelling today?
   McElvaine: In North America, the things that are very interesting are small.

OID: That's what we keep hearing.
   McElvaine: And there are a number of retailers out there that we think we're buying at a very low multiple of earnings. For example, there's Chateau Stores of Canada [CTUa.TO/Can]. Its stock is 70% below its 1994 high of C$17. And then there's Reitman's...

OID: One at a time, please. In any case, I imagine they're down for a reason -- and possibly a good one.
   McElvaine: The reason why all of these are down is that they have a significant portion of their business related to women's apparel.

OID: That's certainly been a kiss of death in the U.S.
   McElvaine: So not only have they gotten tainted by being in retailing, but they've also gotten tainted by being in women's retailing. People just didn't want to own these things in the Fall -- which is when we bought our positions in most of them.
   But one of the ones we bought in the latest quarter is Chateau. It's a Montreal-based retailer of women's clothing. Their target market is aged 15-30. They have 145 outlets across Canada. And they do about C$142 million in sales.

OID: What makes you believe they're a bargain?
   McElvaine: Well, Chateau sells for C$5 and change. It has approximately 4.5 million shares outstanding. And it has just over C$8 million -- or about C$1.75 per share -- of net cash. So, in effect, you can buy the business today for less than C$3.50 per share -- or about C$16 million. And, therefore, net of cash, Chateau Stores is selling for less than 10¢ on the dollar of sales.

OID: Sounds like a good answer so far.
   McElvaine: And this year, their retail operation looks like it will probably earn about C$7 million -- or C$1.50 per share pretax and maybe C85¢ per share after tax.

OID: So that net of cash, Chateau is selling for roughly 4 times this year's earnings.
   McElvaine: That's right.

OID: And Chateau Stores' book value?
   McElvaine: About C$7.90 as of December 31st.

OID: So it's only selling at about 2/3s of book!
McElvaine: Yeah.

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