2024-01-15 08:40:06 ET
Summary
- Information Services Corporation holds a monopoly with its Saskatchewan land registry contract, ensuring strong cash flows for decades.
- ISV's Technology Solutions segment has been gaining momentum with multiple contract wins.
- ISV's valuation is attractive, trading at just 8.0x Fwd EV/EBITDA.
Information Services Corporation (IRMTF) (ISV:CA) remains one of the more attractive stocks within my research coverage, as the company essentially holds a monopoly with its Saskatchewan land registry contract. While negative sentiment towards Canadian real estate has kept a lid on real estate related stocks like ISV, the underlying business continues to perform well.
ISV recently renewed its key Saskatchewan land registry contract, ensuring strong cash flows for decades to come. Momentum has also been building in ISV's Technology Solution segment, with multiple contract wins in the last few months. ISV's valuation continues to look attractive, trading at just 8.0x Fwd EV/EBITDA.
I am maintaining my buy rating at this time.
(All figures in this article are quoted in Canadian dollars unless otherwise indicated)
Brief Company Overview
Before going over the company's latest developments, I believe it may be prudent to go over the company's business segments for any readers new to the story.
Information Services Corporation provides registry and information management services to governments and private entities. The company was formerly a crown corporation called Saskatchewan Land Information Services Corporation , but was privatized in 2013 through an IPO.
Post the 2013 IPO transaction, ISV has been on a strategic path to acquire and develop complementary businesses to its core land registry business. This has included the acquisition of ESC Corporate Services Inc., a provider of business registries and services in Ontario, Enterprise Registry Solutions, a registry service in Ireland, and Paragon Inc., an asset recovery firm in Canada.
Currently, ISV's business is organized into 3 main segments: Registry Operations that provide registry services on behalf of governments and private sector organizations; Services that deliver products and services using public records and data to customers in the legal and financial sectors; and Technology Solutions that develop, deliver, and support registry and related services (Figure 1).
Recently, the company was able to renew its Saskatchewan land registry contract with the Canadian provincial government until 2053. This ensures ISV will receive the stable revenues and cash flows from providing land registry services to Saskatchewanians for decades to come.
Decline In Quarterly Earnings From Higher Interest Expenses
As part of the renewal of the Saskatchewan land registry contract, ISV had to make an upfront payment of $150 million to the province, along with 5 annual payments of $30 million, beginning in July 2024. As ISV did not have $150 million of cash on its balance sheet, the company had to borrow the funds from a syndicate of lenders.
The increased interest expense from the new borrowings ($1.2 million in Q3/2022 to $5.5 million in Q3/2023) was the primary reason why, despite quarterly revenues rising 11.9% YoY to $54.6 million, ISV saw net income decline 46.2% YoY to $4.2 million (Figure 2).
ISV also experienced increased amortization expense from the Saskatchewan contract renewal, as well as wage inflation across its businesses.
However, management expects results to improve in the coming quarters and years, as ISV was allowed to implement price increases for its Saskatchewan land registry services. For example, an increase to the ad valorem fees on high value transactions was implemented on July 29th, 2023.
Free Cash Flow Improves YoY, Reflecting Strong Business Fundamentals
On the positive side, ISV's adjusted free cash flow improved 26.3% YoY to $14.4 million in the latest quarter, reflecting the strong cash flow generating capability of the land registry business (Figure 3).
Rapid Deleveraging Is Management's Goal
While the short-term decline in net income is undesirable, investors should bear in mind the long-term benefits of the Saskatchewan contract renewal. As shown in my prior article, I estimate the contract renewal to generate ~$280 million in net present value to shareholders over the coming years.
Furthermore, with strong free cash flow generation, ISV should be able to bring down leverage rapidly in the coming quarters. Already, since the contract renewal in July, ISV has been able to repay $14 million in long-term debt, bringing total debt to $187.2 million as of September 30, 2023.
In the long-run, the company has a goal to bring leverage down to 2.0-2.5x Net Debt / EBITDA from the current 2.9x level.
Saskatchewan Real Estate Stable Despite Headlines
While headlines regarding Canadian real estate continues to be downbeat, industry fundamentals are not as bad as they appear, especially in Saskatchewan. For example, according to the Saskatchewan Realtors Association , Saskatchewan residential real estate transactions were fairly stable in 2023, down marginally YoY but above the 10-year average (Figure 4).
Furthermore, ISV's land registry business is not restricted to residential real estate, but also includes commercial, agricultural, industrial, and government transactions.
For ISV, land registry transaction volumes are only down 1% YoY in Q3, and revenues actually improved YoY due to price increases mentioned above (Figure 5).
Strong Contract Wins Show Business Momentum
Furthermore, while the Saskatchewan land registry business remains ISV's bread and butter, investors should not overlook the strong momentum in the other business segments either.
For example, subsequent to the quarter, ISV's Technology Solutions segment won a US$3.2 million, 5-year contract to deliver a modern, online Uniform Commercial Code System to the State of Michigan.
More recently, ISV was selected by the Bank of Canada to deliver and operate a Bank Act Security Registry for the bank. However, financial terms of this contract were not disclosed.
Valuation Remains Attractive
Currently, ISV is trading at an enterprise value of $586 million (Figure 6). Compared to the company's adj. EBITDA guidance of $73.5 million, ISV continues to look attractive, trading at just 8.0x EV/EBITDA.
I believe ISV should be worth at least 12x Fwd EV/EBITDA, as technology and real estate service peers all trade above that valuation level (Figure 7).
At 12x Fwd EV/EBITDA, ISV's equity should be worth $700 million, or $39 / share.
ISV also pays an attractive quarterly dividend of $0.23 / share or 4.0% dividend yield.
Risks To ISV
The biggest risk to ISV in the near-term remains the Saskatchewan housing market. As we mentioned above, the Saskatchewan land registry remains the company's core revenue generator, so if the Saskatchewan housing market deteriorates, we can expect less transactions and thus less revenues for ISV.
However, as we have also mentioned, the land registry business is not solely reliant on residential real estate, but also tracks commercial, agricultural, industrial, and government transactions. So even if residential real estate transaction continues to decline, overall transaction count should be more stable and provide a core level of revenues and cash flows.
Another headwind for ISV is interest rates. As the company took on significant leverage via bank loans to complete the Saskatchewan contract renewal, profitability has been reduced in the near-term. If short-term interest rates remain high or even increases, it could lengthen the time it takes for ISV to delever.
Finally, it should be noted that all of ISV's business lines: land registry, public records management and technology solutions development, are all correlated to the economy to some degree. If economic growth slows, especially in Canada and the United States, then usage of ISV's services may decline.
Conclusion
Information Services Corp. saw a steep YoY decline in Q3 net income, primarily as a result of increased interest expenses from its Saskatchewan land registry contract renewal. However, underlying free cash flows remain strong.
I believe financial performance should improve in the coming quarters as ISV pays down its debts. The company was allowed to implement price increases in Saskatchewan, which should help revenues going forward.
Trading at just 8.0x Fwd EV/EBITDA, ISV looks cheap compared to real estate services and technology peers. I am maintaining my buy recommendation at this time.
For further details see:
Information Services Corporation: Free Cash Flow Machine