Jumping the Shark The Toronto Stock Exchange trailed almost every other stock exchange worldwide in 2017 and of these, trailed many by a staggering margin. 2018 has started on a similar path. The TSX is currently up 0.11%, which is better than a kick to the shins, but it is still less than what some markets are returning per day in 2018. The Capital Ideas Fund was up 10.85% 1 in 2017 versus 9.10% 2 for the market. We certainly do not feel like we hit a home run last year, but we continue to improve our batting average, now having beat the market 9 out of the last 10 fiscal years. Over this time (since inception) our annualized return sits at 19.7% 1 after fees while the market significantly lagged at 6.7% 2 . The term “jumping the shark” originated from the 70’s hit TV show Happy Days . For a half-hour each day, America would tune-in and watch the Cunninghams, an All-American family living in Wisconsin during the 50’s & 60’s . For context, it was the Modern Family, Friends, Simpsons, Home Improvement, Full House or Roseanne but of the 70’s. The show may be best known for introducing the character Arthur Fonzarelli, also known as “ the Fonz, ” played by Henry Winkler. Originally, Fonzie was a secondary character to Richie Cunningham. But early on, the producers saw his popularity growing and aptly put him front and center. This pivot proved to be the right choice as Fonzie became one of the most iconic characters in television history. Today, his leather jacket is on display at The National Museum of American History in Washington, D.C. However, the same old shtick started to stagnate by the 5 th season of Happy Days and as viewership started to decline, the writers started to rely on gimmicks, guest appearances and outlandish plot twists (ie. Robin Williams as an Alien). There were even multiple spin-offs of the show including Laverne & Shirley , Mork & Mindy and Joanie Loves Chachi . One of the more infamous gimmicks VOLUME XXXXII JANUARY 2018 INVESTMENT I SSUES • STRATEGIES • INSIGHTS FROM DONVILLE KENT

2 ROE REPORTER | DKAM used to attract viewers was a leather clad Fonzie attempting to jump over a shark while water-skiing , thus originating the phrase “jumping the shark.” Over time, this expression has come to refer to attempting to combat shifting industry preferences, reaching outside their original scope or a last shot to save a venture. How does this relate to asset allocation and investing? We see a lot of similarities between the evolution of Happy Days and the natural evolution of consumers and businesses that affect the economy every day. The matter of shifting consumer preferences causing businesses to pivot, spin-off, acquire or use gimmicks to survive is nothing new — we are just seeing it with increasing frequency in today’s economy. In past newsletters, we’ve extensively co vered our thoughts on knowledge- based industries, specifically technology . We’re constantly on the lookout for emerging technology companies with great management teams and the potential to generate significant returns for shareholders. However, there is another side to this investment story and we’re going to cover two examples below. Almost by rule, new technology is disruptive and for each problem being solved, simplified or improved, there is an incumbent business being displaced. From an investment perspective, you want to ride the disruptive technology wave and avoid the businesses being swept aside. Most investment analysis, press coverage and s hare of mind is spent on the up and coming… the New New Thing . However, optimal portfolio management also includes not owning stocks of businesses that are, or are about to be, disrupted. We’re going to dive into a few examples of gimmicks, stale business models, and shifting industry dynamics. There are gimmicks such as changing the name of your business. There also continue to be stale business models where what used to work no longer does. Other companies are stuck with business models that are working today, but may not in the not too distant future. Investing versus Gambling Weed stocks, lithium companies, cryptocurrencies, blockchain ventures and AI plays were the highflying asset classes of 2017 and we’re using the term “asset” generously. We don’t have anything against most of these industries in theory and there are a handful of companies with real operations, which generate actual cash-flows. However, it has been hard to watch as their stocks seem to hit the jackpot and investors continue to double down. The ability to instantaneously increase your market cap by hundreds of millions of dollars simply by saying you’re planning on doing “_______ on the blockchain” or being valued on a massive projected sales multiple when you’r e still pre-revenue or not ever planning on having real operations is providing an incentive for companies to

3 ROE REPORTER | DKAM take part in these fictional gimmicks. But we believe that, like the Fonz, they are “jumping the shark.” We don’t want to belabo ur the point or give these faux companies any more attention (since every media outlet has already given them more than they deserve). What needs to be made clear, is that the Capital Ideas Fund continues to outperform the market because we have remained loyal to our long-term core strategy. We continue to own highly profitable, quality companies trading on fair valuations. Our investors deserve a high level of discipline and commitment. We like to refer to this as thinking algorithmically — investing unemotionally using a systematic process. We are continuously evaluating and ranking companies based on our proven metrics. This keeps us disciplined and out of the casino. In this gambling environment of lottery-like stratospheric price runs our strategy may appear boring. But we’ll continue to operate as a well -oiled machine focused on consistent compounded growth instead of wasting our time and money on buying lottery tickets and crossing our fingers. Put another way, we should always be able to articulate at what price we would buy and at which price we would sell any asset. This comes from the core of investing and being able to determine an asset’s fundamental value versus buying something purely based on speculation. The distinction between investing and gambling is especially relevant now because as we near the end of the cycle, all the players will have to show their cards and we think you’ll see that many players were bluffing. If you can’t forecast it, you can’t value it We still view Return on Equity as the best metric to measure not only the magnitude of value creation, but also as a way to gauge the strength of the moat protecting a business model. An important distinction for this newsletter specifically, is that for this investment strategy to work, the co mpany’s competitive advantage needs to be able to defend or deter pressures from potential competitors. The stronger a company’s moat, the more confident you can be in forecasting future sales and margins. In other words, for the buy and hold strategy to work, you need to be confident with the long-term outlook for the business. Ideally, we invest like Buffet and plan to buy and hold forever, with the major caveat that the investment thesis doesn’t change over that time. Profitable businesses are always under attack from either competitors who want a piece of the action or innovators creating a new and improved solution. This constant pressure is why being able to evaluate a business’s competitive advantage is so important.

4 ROE REPORTER | DKAM Industry dynamics do change and portfolio management requires the certain skill of being able to foresee what’s around the next corner. If you don’t know what a company or industry will look like in the future, how do you forecast its value? We firmly believe that if you can’t forecast it, you can’t value it. Stale Popcorn In Happy Days , jumping the shark was used to distract the audience from tired storylines. Increasingly, we’re seeing comparable gimmicks used by companies to distract patient shareholders from their stale businesses. We were not shareholders of Cineplex this past year (thankfully!) but we’ll briefly discuss it here because it provides a great example of how technology can disrupt an industry. Cineplex might not go the way of Blockbuster, but its appeal has certainly diminished. What’s the headwind in this case? The movie theater had a competitive advantage because it used to get new releases 6 months ahead of time before they were sold/rented to the public on VHS. The exclusivity window at the theatre has slowly declined over-time to the point where movies are now being released for digital download instantaneously with their theatrical release. Taking this one step further, Netflix, which has over 118 million monthly subscribers, released Bright last year, their first full-length original movie only available on their platform. Bright received 11 million viewers in the US in the first 3 days which would put it roughly in-line with Wonder Woman and Spider Man . Netflix plans to spend $6 billion on original content in 2018 with a $2 billion marketing budget. Currently, Netflix, Amazon Prime and Hulu all have award winning original content that can’t be viewed in the movie theater. In addition, the gap between the viewing experience at the theatre versus at home used to be immense. However, now the home viewing experience has also changed considerably as the quality has improved while the price has dropped. For example, the Samsung 55” 4K Ultra HD Smart TV is on sale at Best Buy for $699.99, which would have cost roughly $2,200 in 2012. The idea of scheduling your night around a 7:00 pm showtime is dying, at least for the up-and-coming Millennials and especially Generation Z. The “ On- Demand Economy ” is ushering in a paradigm shift that includes: taxis (Uber), hotels/house rental (AirBnB), TV (Netflix, Hulu, Amazon Prime Video, Apple TV), office space (Breather, Sharedesk), and doctors (Akira, Doctor on Demand), just to name a few. Granted, Cineplex offers digital rentals online b ut now they’re competing with all of the above offering s plus your cable ’s on- demand channel and they also lose-out on all that delicious high margin popcorn, candy and pop.

5 ROE REPORTER | DKAM Looking at Cineplex’s stock price (Fig. 1), it seems like shareholders are starting to see this picture in HD as well. However, investers are still paying a ~30x multiple for 2018 earnings, almost double the current TSX Composite multiple of ~16x 2018 earnings. Figure 1. We think the remaining investors are sticking around for the yield (5.35%), but with a projected payout ratio well above 100% we believe the dividend is only feasible if they continually increase leverage. Source: DKAM Similar to the writers of Happy Days , CGX management has started to reach outside the ordinary course of business and look for ways to jump the shark. As a gimmick, Cineplex has started to offer Xbox Big Screen Parties to appeal to gamers. For plot twists, they have been opening stand-alone restaurant and arcade locations and completely removing the big screen altogether. For guest appearances, they have been substituting regular movies for special live content events, such as offering Super Bowl viewing parties. To us, these appear to be flashy headlines that don’t address the fundamental underlying issue of a declining customer base in their core business. This leads us to question what Cineplex might look like 5 years from now. What are the economics of that business? Again, if you can’t forecast it, you can’t value it. One more for the road Finally, the third iteration of our “ jumping the shark ” analogy applies to secular headwinds. In this case, we’re trying to look ahead in order to get out of the way of a disruptive technology that could potentially shift the entire industry dynamic. One such technology is electric vehicles which we think will dramatically affect the gas station industry. The crux of the argument boils down to how much of the market electric vehicles will claim and at what pace. Much like the scenario of the HD TV stated above, electric car technology continues to increase as the price continues to fall 3 . Let’s play this scenario out. If you own an electric car, you get to charge it at home (~90% of electric car owners currently charge at home or work 3 ). Combine that with the fact that ~80% of all daily traffic is commuters traveling an average of less than 30

6 ROE REPORTER | DKAM minutes 4 . This completely eliminates your weekly stop at the gas station. If all of these electric cars get their energy from home versus the gas stations, then a lot of money is shifting in the economy. This means that there will be winners and losers from this shift — disruptors and disruptees, if you will. Who will be disrupted? If you aren’t familiar with Alimentation Couche-Tard, you’ll recognize them by their main gas station and convenience store brands: Mac’s & Circle K. Alimentation Couche-Tard (ATD) has a $37 billion market cap and is one of Canada’s great business success stories. However, the most significant point is that ~70% of their revenue is tied to fuel sales. A very large portion of this revenue is at risk of shifting from their gas pumps to your garage’s electrical outlet , and thus your home energy provider. ATD management, analysts and industry experts all agree that the adoption of the electrical vehicle will continue to increase. What is up for debate, is the magnitude and speed of this shift. In ATD’s most recent investor presentation , they reference the U.S Energy Information Administration’s International Energy Outlook for 2017. This outlook forecasts the penetration of plug-in electric vehicles will be gradual , estimating penetration of 5% by 2030, 9% by 2035, and 14% by 2040 5 . Should you take this penetration rate at face value? We think not. Going back to 1900, this would be by far the slowest adoption rate of any major consumer technology after commercialization (Fig 2). Figure 2. Looking down this list, almost every example faced some type of pushback at the beginning. The pushback against electric cars is that they are too expensive, don’t ha ve enough range or sufficient charging infrastructure. For context, the Tesla Model 3 will have a 352km range and cost ~$43,000 CAD 6 . However, both PCs and Color TVs were inordinately expensive when they were introduced. The Phone, Car and Internet all had major infrastructure headwinds during their introductions as well. Consumer Technology Time to achieve 20% penetration (years) Time to achieve 50% penetration (years) Stove 19 36 Phone 4 43 Electricity 7 16 Car 3 10 Radio 2 5 Washer 5 35 Refrigerator 3 11 TV 1 3 Dryer 5 18 Air Conditioner 9 17 Dish Washer 6 35 Color TV 2 7 Microwave 3 7 VCR 2 4 PC 7 15 Cell Phone 2 7 Internet 4 8 HDTV 1 2 Smart Phone 1 3 Tablet 1 NA Average time to reach high penetration (years) 4.4 14.8 Source: DKAM Technology Penetration Rates in the US

7 ROE REPORTER | DKAM Exponential growth always seems to be underestimated at the time when a new technology is in its early stages, and it is not until after the initial lag period that the impact can really be seen. Figure 3 illustrates this trend and shows how technology doesn’t get adopted at a gradual pace — rather there is the initial slow acceptance phase, before a rapid uptick in consumer use. Figure 3. If the electric car headwind facing ~70% of ATD’s business didn’t provide enough uncertainty to the business model, the remaining ~30% of the business is “Food and Beverage” of which ~ 40% 7 is tobacco, which is undeniably in secular decline. The ability of this company to handle two long- term secular headwinds isn’t a risk we’re willing to take. We by no means are saying you won’t make money in the stock or management won’t be able to successfully shift the business model. What we are saying is that we’r e not confident in our ability to predict the future value of cash-flows for this business without knowing what the future economics of the industry will look like. Once again, i f you can’t forecast it, you can’t value it.

8 ROE REPORTER | DKAM Wh at We’re Reading Elon Musk: How the billionaire CEO of Spacex and Tesla is shaping our future - Ashlee Vance The Everything Store: Jeff Bezos and the Age of Amazon - Brad Stone Bracing Yourself for a Possible Near-Term Melt-Up - Jeremy Grantham The Premature Demonization of Stock Repurchases – AQR Capital Management Final Thoughts We recently celebrated our firm’s 10 -year anniversary. This milestone provided the opportunity to reflect on how we got here. Over the years it has become apparent that we employ some of the best and brightest in the industry. Their curiosity, passion and hard work make every day enjoyable. The firm also would have never gotten here without having the support of great investors. We want to thank you, our investors, for partnering with us. We believe we have done a good job creating value along the way and look forward to continuing this great partnership going forward. Thank you to our investors and to our great team. J.P. Donville & Jesse Gamble info@donvillekent.com

9 ROE REPORTER | DKAM All estimates, projections and calculations have been generated by DKAM. This does not constitute advice for personal investments but rather a breakdown of how Donville Kent approaches stock analysis. 1 Time weighted rates of return for Class A Series 1, net of all fees and expenses as of December 29 th , 2017. 2 S&P TSX Composite Total Return Index is the Net Total Return version of the S&P/TSX Composite Index. 3 Global EV Outlook 2017, Two million and counting, International Energy Agency 4 http://www.statcan.gc.ca/daily-quotidien/171129/dq171129c-eng.htm 5 http://corpo.couche-tard.com/wp-content/uploads/2018/01/Couche-Tard-Investor-Day-Overall- Presentation-Final.pdf 6 https://www.tesla.com/en_CA/model 3 7 DKAM Estimate DISCLAIMER Readers are advised that the material herein should be used solely for informational purposes. Donville Kent Asset Management Inc. (DKAM) does not purport to tell or suggest which investment securities members or readers should buy or sell for themselves. Readers should always conduct their own research and due diligence and obtain professional advice before making any investment decision. DKAM will not be liable for any loss or damage caused by a reader's reliance on information obtained in any of our newsletters, presentations, special reports, email correspondence, or on our website. Our readers are solely responsible for their own investment decisions. The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase or sale of securities. Our opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. All information contained in our newsletters, presentations or on our website should be independently verified with the companies mentioned. The editor and publisher are not responsible for errors or omissions. Past performance does not guarantee future results. Unit value and investment returns will fluctuate and there is no assurance that a fund can maintain a specific net asset value. The fund is available to investors eligible to invest under a prospectus exemption, such as accredited investors. Prospective investors should rely solely on the Fund's offering documentation, which outlines the risk factors in making a decision to invest. The S&P/TSX Composite Total Return Index ("the index") is similar to the DKAM Capital Ideas Fund LP ("the fund") in that both include publicly traded Canadian equities of various market capitalizations across several industries, and reflect both movements in the stock prices as well as reinvestment of dividend income. However, there are several differences between the fund and the index, as the fund can invest both long and short, can utilize leverage, can take concentrated positions in single equities, and may invest in companies that have smaller market capitalizations then those that are included in the index. In addition, the index does not include any fees or expenses whereas the fund data presented is net of all fees and expenses. The source of the index data is Bloomberg. DKAM receives no compensation of any kind from any companies that are mentioned in our newsletters or on our website. Any opinions expressed are subject to change without notice. The DKAM Capital Ideas Fund, employees, writers, and other related parties may hold positions in the securities that are discussed in our newsletters, presentations or on our website.