Tuesday, 19 July 2011

Is Carfinco Undervalued? Three Analysts Say Yes!

Carfinco Income Fund
Units outstanding: 23.97 million
Units fully diluted: 24.6 million

Carfinco has had its share of accolades over the last two years and recently has been a Top Pick of two BNN celebrities - Sprott Analyst Jamie Horvat and Jason Donville of Donville Kent Asset Management.

After recent news of another record quarter and the winning of a major servicing contract, increasing the company's loan portfolio by $150 million (June 29th), each of three analysts covering Carfinco have increased the earnings targets for the fund and more importantly, the targeted value of the unit price.

Fred Westra of Industrial Alliance has upgraded Carfinco's target price to $9.50 and continued to give it a "Top Pick" recommendation which is only given to 3% of IA's coverage universe. The updated report can be viewed by clicking here and Fred had this to say;

We are increasing our estimates based on strong Q1/11 results, the upside in the fund servicing agreement and the impact of IFRS. Our revised FY11E and FY12E EPS increase to $0.70 and $0.82, respectively, from $0.63 and $0.74. We maintain our valuation methodology applying a 14x multiple on 2011E EPS to derive a new target price of $9.50 from $8.80 and reiterate our TOP PICK recommendation. This equates to a potential total return of 52.2%.

CFN has outstanding profitability (59.0% ROE) and a yield of 4.7% (payout of only 39%). Investors should accumulate as we view CFN as not only a great defensive play in volatile markets given its strong credit quality, favourable demographics and used auto sales trends, but also offers a very attractive growth profile.

GMP Securities Steven Boland increased his target price to $9.50 and continued his Buy recommendation with this to say;

We value CFN.UN by applying an 11.0 times P/E multiple (was 11.0x on F11) to F12E EPU. Applying our multiple to our new F12E EPU of $0.88 produces our target price of $9.50 which is increased from $8.00. With greater than 20% growth, a sustainable ROE above 50%, a healthy yield and new products, institutions should revisit this story.

Click here to view the GMP report.

Stonecap Securities analyst Dylan Steuart increased his target price on June 16th to $9.00 with an Outperform rating which is the top rating used at the firm. He summarized the Carfinco opportunity with the following;

Increased loan book, stable margins, and a meaningful improvement in the underlying credit all show that the trust is executing well on its strategy and the primary reasons behind our decision to raise our EPU estimates. The trust remains very much a high yield (4.7%), high return (59% ROE) investment story with promising growth potential. Maintain OUTPERFORM.

See full Stonecap report here.