Sector: FINANCIAL SERVICES
Analyst: DYLAN STEUART, CFA Company Statistics Market Cap $181.5 MM Basic Shares O/S 98.1 MM Fully Diluted Shares O/S 98.1 MM 52-Week Range $3.00-$1.25 Cash & Cash Equivalent $37.9 MM Earnings Summary FYE: December 2012A 2013F 2014F 2015F Revenues($MM) $139.5 $139.0 $142.2 $157.1 Net Income ($MM) $10.0 $9.5 $20.6 $26.6 EPS - Cont. Ops. $0.11 $0.16 $0.21 $0.27 BVPS $1.00 $1.17 $1.40 $1.68 Trading Parameters P/E 16.8x 11.3x 8.6x 6.7x P/B 1.8x 1.5x 1.3x 1.1x
COUNSEL CORPORATION 12-Month Target: $2.75
e-mail: Dylan.steuart@jenningscapital.com
(TSX-CXS $1.81) Risk Rating: AVERAGE
Tel: (416) 304-2191 Fax: (416) 214-9223
VALUATION AND CATALYST REVIEW
Counsel Corporation primarily operates through its subsidiary, Street Capital Financial Corporation. Street Capital is a lender of prime, residential mortgages originated through the mortgage broker channel. CXS is currently in the process of divesting its non-core businesses.
In this report, we update the current valuation for CXS following solid Q4/13 results and point to the potential upside from two near-term catalysts: 1) margin expansion from escalating renewed mortgages; and 2) loan growth and profitability tied to assumed successful approval of a Schedule 1 Bank licence.
As of yesterday’s close, CXS is trading at an 8.2x forward P/E ratio based on consensus estimates, a 10% discount to its peers within the non-bank mortgage lending segment.
Margin expansion from renewed mortgages: CXS subsidiary Street Capital has grown mortgages sold solidly every year since its inception in 2007, building a book of mortgages under administration (MUA) of $17.5 billion at year-end.
https://www.counselcorp.com
Even if Street Capital realized zero volume growth from the $7.7 billion mortgages sold in 2013, the greater percentage of relative renewals compared to new originations should drive margin expansion by the end of 2014 and beyond. We approximate margin upside of near 35 bps by 2017, assuming 50% renewal capture on expected mortgages expiring.
Bank Licence would unlock cheaper funding and higher yielding product expansion: While too soon to model effectively for CXS, we look at the growth and success of peers, Home Capital (HCG-T, not rated) and Equitable Group (EQB-T, not rated) in order to get a taste of what a Schedule 1 Bank licence would mean for Street Capital.
We note that both HCG and EQB have shown exceptional growth in their Alt-A mortgage offerings (+30%) and have yielded net interest margins of 2.75% on average, nearly three times as high as Street’s current insured mortgage offerings. Even a modest initial loan portfolio could be very accretive for Street Capital.
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 with a BUY rating and 12-month target price of $2.75 per share.