Jennings
COUNSEL CORPORATION 12-Month Target: $2.75
(TSX-CXS $1.90) Risk Rating: AVERAGE
MAINTAINING EPS FORECASTS AS MARGIN EXPANSION OFFSETS MARKET SHARE SLIP
CXS reported Q4/13 (ended December 2013) diluted EPS from continuing operations of $0.05, an increase over the $0.03 reported last quarter and ahead of our expectation of $0.02. One-time gains of $4.8 million related to fair value appreciation of the private equity portfolio aided the bottom line. However, earnings before taxes and FV adjustments (the best measure of Street Capital, the core mortgage business) were $5.5 million, more than double our estimate.
Revenue of $28.4 million was 6% below our forecast, as lower than expected mortgages sold were $1.4 billion vs our forecast of $1.76 billion.
Management noted that there has been increased competition in the space from two large competitors, impacting mortgage originations in the quarter. Positive data from direct competitors and overall market volume strength Y/Y appear to confirm a market share slip for CXS.
However, the Company was able to achieve strong margin expansion on mortgages sold, earning a net gain percentage of 94 bps in the quarter, the highest result in nearly two years and up from 62 bps earned last quarter. While signs of competitive mortgage rates from the Big Six banks entering the spring season temper our margin expansion expectations, continued low Government bond yields should allow for stronger margins heading into the first quarter of 2014.
Management indicated that subsequent to the quarter, they have successfully disposed of the remaining non-core businesses (the lone remaining commercial real estate building, Case Goods), allowing CXS to concentrate resources and efforts on the core, Street Capital business.
Valuation Methodology
The target price is based on applying a 13.0x multiple to our 2014F diluted EPS estimate of $0.21.
Recommendation
We continue to recommend CXS as a BUY and maintain our 12-month target price of $2.75 per share.