stability in 2020 leads to big growth plans for 2021 once again, I like this look of this small cap cdn lender for 2021. reminds me of versabank report, where they talked about big growth in loan growth in 2021 after years of no growth. chw similar story. these sleeper stocks like chw and vb i think will continue to do well, especially with backdrop of v strong economy helped by pent up demand and govt stimulus.
key chw takeaways for me positive - stability and big growth in originations forecast in 2021. Covid modified loans are falling and just 3% in fourth quarter - loan book growth restarted in December - funding costs have fallen and now reliant on multiple channels. returning about $1.25M per month in dividends and buybacks to shareholders , which is close to 10% shareholder yield on annualized basis. even in very tough year, free cash flow was over $1 per share. staying long – big loan book growth, large pent up demand in market and potential for big shareholder returns (price appreciation and dividend increases) are my catalysts.
p.22 of annual report – maximum dividends (and repurchases) permitted (90% of trailing fcf) was $18.6M in 2020. dividends paid was just little over $5 M and repurchases just $785k in 2020, so less than $6 M spent, understandable due to covid and uncertainty. has now changed. In 2021 so far, buying back almost $900k in shares per month(jan and feb) and dividend costing $340k per month, so total about $1.24M per month YTD or $14.9 M annualized. board probably looked at stock price and expected growth in loan book and thought made more sense to buyback stock here. as economy and loan book increases in 2021, maybe that shifts back to dividends as share price goes higher. seems to make sense as book value will be growing in 2021. buy now on the cheap maybe was board’s thinking. would lead to bigger dividends in future if good returns on larger loan book on reduced share count. buyback has been very active with 266k repurchased since December 3. if board had decided to not do repurchases and just dividend, $1.24M in monthly dividends would be $0.075 per share, or $0.90 annualized. share price would be close to 10% dividend yield.
good growth expected in the loan book, with guidance of more than $650 million in new originations in 2021. P.54 of annual report (‘funds advanced on origination of finance receivables’) says total originations (+ origination cost) were $300 million in 2020 and $480 million in 2019. 70% of 2021 growth forecast to be prime credits. not sure if timing difference between approved and funded, but big growth seems likely for 2021. this is a big change compared to last few years for CHW (where there wasn’t much growth, which hurt multiple). V important funding changes allow this.
maybe most interesting part of annual report was on funding, and the changes going on , which explains why CHW will be able to grow the loan book so much in 2021. this seems a big change from previous management.
from P. 4 of annual report - “We have begun making changes to our funding infrastructure to further stabilize access to capital necessary to fund our originations. Our newest facility supporting our U.S. business provides for bulk asset purchases of our non-prime originations. This committed source of capital had not previously been available, which had made us reliant on our corporate revolver for these assets. This will no longer be the case. In addition to this facility, we are looking to streamline our process of getting prime receivables to ABS buyers. We currently have two outstanding ABS receivables packages, both of which are performing well and improving our credibility in these markets for future offerings. As we move forward in 2021, we see an opportunity to connect private credit investors with commercial borrowers. Investors that are allocating capital to private credit investment funds, in search of yield, are an appealing source of funds that could further improve our objective for stable and diversified funding. This additional source of capital is unique compared to our existing conduits and it is our expectation that experience in this channel will become increasingly important over time.”