Thursday, 18 March 2010

Carfinco Receives Strong Buy Rating From Industrial Alliance

Carfinco Income Fund (TSX: CFN.UN)
Units issued: 23.9 million
Units fully diluted: 24 million
Current monthly distribution: $0.02
Q1/2010 special distribution: $0.04



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Carfinco has attracted a lot of positive attention as of late with much of it related to a recently developed relationship with Montreal based Industrial Alliance Securities Inc.
The initial meeting took place with Industrial Alliance last November when Carfinco was "breaking out" with news that its third quarter matched its highest per unit earnings ever at $0.09 or annualized $0.36 per unit. At the time the units were trading in the $2 range.

Analyst Fred Westra who specializes in Non-Bank Financials immediately saw the "blue sky" potential in Carfinco resulting in his initial research report this past February. Titled "Small Niche Lending Play, Big Time Potential" the report profiled Carfinco with a Strong Buy Rating and a 12 month price target of $3.50.

Fred updated his coverage on March 15th raising his 12 month target to $3.75 based on Q4 Earnings.
Highlights of the updated report include:

Loan Receivables expected to reach $111m, compared to $108m in Q4/08. Management slashed its growth oriented activities in 2008 in favour of a heightened risk management focus. This slowed 2009 growth, but lead to strong profitability. Growth is now picking up and Management has applied renewed focus in this area which should translate into healthy 2010 numbers.

We anticipate revenues of $8.8m for the quarter, 7.1% higher than Q4/08. While not an exciting number by itself, it is expected to surpass the F2009E growth rate of ~4.5%, indicating a ramp up in growth is afoot. Earnings for the quarter are expected to be $2.1m, or $0.09/unit,
compared with a loss of $0.6m, or -$0.02/unit, in Q4/08. Distributable cash per unit is expected to ~$0.08

COMMENTARY
Carfinco has benefited over the past few months from strong performance of its loan book in 2009. Low losses, higher recoveries and better delinquencies due to exceptional underwriting processes have combined to make CFN’s book very profitable. Along with a recovery on loan receivables growth, Management has raised their regular distribution 33% to $0.02/mth, publically stated their intention to maintain this distribution after the 2011 tax deadline, and announced a $0.04 Q1/10 special distribution (double our expectation).

IMPLICATION
With an 8% base yield that will be stable after tax, double digit top line growth and operating leverage, CFN is an attractive story at this juncture despite having risen 45% since our initiation report.

RECOMMENDATION
CFN is a led by an experienced management team, with an excellent track record and a material ownership stake. The Company has significant growth and earnings expansion opportunities, proven risk management processes and a solid balance sheet to weather uncertainties. The 37.5% potential total return from Carfinco’s most recent closing price results in our maintaining our STRONG BUY recommendation.

Read the entire March 17th report by clicking here.........................