Thursday, 23 May 2013

Carfinco - Perspective On Market Activity

TSX: CFN
Shares outstanding: 26.4 million
Shares fully diluted: 26.4 million

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In light of recent pressure on Carfinco’s stock price, we have spent a considerable amount of time speaking with management, as well as some analysts to gain their perspective on the reasons behind the downward pressure on the stock. 
 
In the past three months the share price has dropped from its 52 week high of $11.68 to lows near $8.00.
 
There appear to be several external factors that have contributed to the downward pressure on the stock.  There are subprime lenders that have been in the news as of late in the U.S. and these articles have suggested potential issues with the off-loading of these loans to other parties, similar to what had happened in the mortgage fiasco in 2008.
 
Contrary to other companies that are being questioned on how they are leveraging growth, Carfinco does not securitize and holds all of its loans on its own balance sheet and thus exercises direct control over its fortunes.
 
It’s clear there was also some market concern when Q4/2012 financials were released, as the annualized loss rate climbed a couple of percentages from 12.8% to 15.1%. On that point, Carfinco management is adamant that the annualized historical loan loss rate is within expectations and anticipate a rate between 13%-16%.  In fact, the Q1/13 rate fell to 13.8% from the Q4/12 rate.
 
There’s belief that these factors in particular led to the sharp sell-off in the stock.  
 
While stopping short of aggressively pounding the table, management is very clear on its message to the market.
  • The Company has delivered consistent 20%+ annual growth over the past 3 years in its business providing car loans to “non-prime” credit applicants and continues to target a 15 – 20% annual increase in the finance receivable portfolio for 2013.
  • Principal balance of finance receivables at end of March 2013: $205.3 million with 20,400 customers.
  • 2012 net earnings increased 20.3% from 2011, reaching $20.6 million.
  • Large management and board ownership (in excess of 15%) aligns the interest with shareholders.
  • Board of Directors intends to maintain a minimum $0.04 per month cash dividend through 2013 and beyond.
  • Recent announcement on May 16, 2013 that ATB Financial has been added to the Company’s banking syndicate adding $25 million, which increases the facility to $205 million, as well as the flexibility of longer term (72 month) loans to customers with a lower risk profile.
  • Recent financing of $17 million completed this past March at $9.75 per share provides the Company with flexibility to pursue potential acquisitions.
  • Has consistently been a Buy recommendation by the analysts covering the Company.
  • Consistently increased its dividend, 2011 - $8.9 million, 2012 -$11.6 million, 2013 -$12.5 million (based on $0.04 per month).

As a reminder, Q1 2013 continued the trend of strong and consistent financial results as outlined below:
 
Earnings per share of 20 cents; Dividends to shareholders of 12 cents per share; Return on shareholders equity of 44.7%; Loan originations of $36.6 million, up 12.9% from the first quarter of fiscal 2012; Record finance receivables of $187.1 million; 31 + day delinquent accounts for the first quarter of 2013 of 3.3%.