BMO - Investor Day Event
HCG hosted its first investor day. There are three key takeaways. First, HCG
continues to operate a best-in-class alternative mortgage lending business
model. Second, the company has a leading market position in a large and
underserved niche market. Third, HCG enjoys high asset and earnings growth
rates, and generates one of the highest ROEs in the financial services industry.
Overall, the tone was positive and we expect the company to continue to do
what it has done for the past 10+ years: deliver above-average asset and
earnings growth and ROE.
Impact
Slightly Positive.
Forecasts
No changes but the investor day provided greater confidence in HCG’s ability to
generate our 2012E and 2013E EPS of $6.15 and $7.00, respectively.
Valuation
We are maintaining our $52.50 target price, reflecting 8.5x 2012E EPS of $6.15.
Recommendation
We reiterate our Outperform rating to reflect a total potential return of nearly
25%. The investor day reaffirmed our thesis that the healthy levels of
immigration and self-employment, the steady stream of personal bankruptcies
and the ability to grab market share from private lenders will enable Home
Capital to outpace the growth of the overall market while earning stable spreads.
The company currently trades at a very reasonable multiple (7x 2012E EPS;
30% discount to the banks) considering our medium-term outlook of earnings
growth in the 10–15% range and ROE in the 20–25% range. However, we
caution investors that we may not see an uptick in the multiple until the current
negative sentiment towards the Canadian housing market improves.
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