Wednesday, 23 June 2010

Carfinco Bank-rolled For Growth

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
Q2/2010 special distribution: $0.10
Carfinco has clear momentum and in order to achieve the fund's planned 20% annual growth over the next two years, it needed to increase its credit facility. The banking syndicate that includes Bank of Montreal, Wells Fargo, and Bank of America have increased the credit facility to $105 million from $85 million.

Fred Westra, analyst at Industrial Alliance summed up what this means for the fund and its investors. Highlights of his updated report released today are below.

Current price: $4.40 Target price: $6.00 Rating: TOP PICK
Analyst: Fred Westra (514) 499-7371

$20m of Additional Growth Capital Through Credit Facility Increase

CFN announced yesterday after the market closed that they had successfully renegotiated an increase in their credit facility with their lending syndicate. The announcement removes uncertainty as to CFN’s access to low-cost growth capital over the coming few years.

- Credit Facility Increase to $105m from $85m
- Rate Remains at prime + 1.75%
- Term Extended from 2 to 3 Years
- Leverage Ratio Reduced to 3.5:1 from 3.75:1

The increase was prorated across syndicate members and is large enough to support CFN’s 20% annual receivables growth targets for the next two years at least. While the facility term is for 3 years, we are confident that CFN could return to the syndicate before then should they require a further increase. The term extension was available without a step-up in the cost of funds so Management opted for the longer term. While a larger increase might have been possible, the standby carry costs become greater for no reason.

The reduced leverage ratio of 3.5:1 is in line with most other lenders with receivables books over $100m. Moreover, CFN has typically always operated with a ratio below this and Management models to target below this level so we do not see this as an impediment to CFN’s growth, but rather just stricter controls and therefore reduced risk to shareholders.

With the facility now renegotiated, CFN has no secured access to low-cost capital for the foreseeable future and thus any related investor uncertainty should now be removed from stock performance.

Loan loss performance and operating efficiencies have positive momentum with nothing significantly negative coming down the pipeline on the loss side. We continue to maintain 2010 receivables growth below Management’s 20% target to be conservative. With very strong reserves, capital capacity to grow and excellent opportunities, we think CFN is significantly undervalued. Our $6.00 target is based on 14x 2010E tax-adjusted EPU of $0.42, representing 45.0% potential total return. Our TOP PICK recommendation is maintained.