Two Canadian Small Cap Value Names With 3%+ Yield

easyThe two Canadian companies I will be focusing on today are Easyhome and Chapter Indigo both leaders in their respective fields nation wide.

 Easyhome

Easyhome Ltd., is a merchandise leasing company. It offers household furnishings, appliances and home electronic products to consumers under weekly or monthly leasing agreements. Easyhome has 115,00 customers and has recently (2010) begun rolling out “Easy Financial” with incredible growth. 

Easyhome is in the specialty retail industry within the consumer cyclical sector. Most recently in the 2012 annual report 1,241 employees were recorded. There are 204 Leasing stores with 70,000 customers, 49 Franchise stores (16 Canada, 33 United States with 17,000 customers) and 100 easy financial location in Canada with 28,000 customer.

Current price per share 9.78 (116M market capitalization)

In 2012 easyhome achieved 6% revenue growth and 8.9% same store revenue growth from the prior year. This was the 11th straight year of consecutive revenue growth. The dividend yield is currently 3.5% and has been paid since 2004 (never being lowered, consistently rising). The cash provided by operating activities after issuance of consumer loans receivable (31.4M in 2012 vs 29.39M in 2011) was 58.15M in the 2012 fiscal year compared to 39.6M in 2011 (48% increase YOY) with 57.34M used in investing activities attributing to 67M Capital expenditures (CAPEX). At the end of 2012 an exchange of stores was completed with a large US retailer having an accretive impact to margins in the period by 160 bps.

2005 EPS= 0.55 (6M net income) & Book Value of $6.65
2006 EPS = 0.86 (9M net income) & Book Value of $6.98
2007 EPS = 1.11 (12M net income) & Book Value of $7.70
2008 EPS = 0.84 (9M net income) & Book Value of $8.25
2009 EPS = 0.55 (6M net income) & Book Value of $8.23
2010 EPS = 0.65 (6.8M net income) & Book Value of $7.73
2011 EPS = 0.81 (10M net income) & Book Value of $8.23
2012 EPS = 0.92 (11M net income) & Book Value of $8.97

eh

In the most recent quarter a 0.822 debt to equity ratio was reported with 61.38M of the 88.12M in liabilities as short-term or “current” (current ratio: 0.87 & quick ratio: 0.84). Current Assets are 53.11M of the 195.25M in total assets. Good will is to be noted at 19.96M (a 2.6M increase from December 31st, 2011). There is 43.12M in retained earnings vs 34M and 29M of 2011 & 2010 respectively.
Some impressive valuation metrics currently would be price to sales of 0.6 (Vs 1.6 S&P/TSX) and a price to cash flow of 2.5 (Vs 8.0 S&PTSX and historical 5 year average of 4.4). Trading just above book value currently with a medium size margin of safety and future growth priced essentially free. Excluding the furniture leasing business Easy Financial consumer loan portfolio grew 49% with 12 new stand alone locations opened in 2012 (13.6% increase).

Easy Financial
2011 Revenue 24.4M vs 2012 Revenue 37.7M (54.4% increase)
2011 Operating income 6.1M vs 2012 Operating income 11.59M (88% increase)
2011 Operating Margins 25.2% vs 2012 Operating margins of 30.7%

In 2012 a long-term financing loan of 30M was secured to fund the growth of Easy Financial. The 2013 target of Easy Financial store openings is 20-25 and a total “Easy Home” business revenue growth of 8-12%.

The 10 year average for revenue growth has been +10.67%
The 10 year average for net income has been +15.5%
The 10 year average for EPS has been +9.84%

2012 ROE was 10.92% vs 9.72% in 2011 and 7.28% in 2010 (364 bps increase from 2010)

Using the simple intrinsic value formula by Benjamin Graham we get the following PPS target.

V = EPS x (8.5 + 2g)

– Where g is a reasonable 7-10 year growth rate. 9.84 for 10 year average EPS growth (implying that carries on for the future).

V = 0.92 x 28.2
V = $25.94 (an incredible 63% discount from Fair Value and an opportunity to almost 300% upside)

chapters indigo logo
Chapters Indigo

Indigo Books & Music, Inc. is a book retailer in Canada, operating bookstores in all 10 provinces and provides consumers with inspiring retail and online environments for books and life enriching products & services. Indigo is in the specialty retail industry within the consumer cyclical sector. Indigo has approximately 6,600 employees in 97 super stores and 143 smaller format stores. Indigo also has a 50% stake in “Calendar Club of Canada” and was recently awarded the 6th place for “Top Canadian Retail Employer Brand” At the beginning of 2012 Indigo sold “Kobo Inc.” further improving the balance sheet but altering the 2012 performance in a positive but un-sustainable manner. Now I understand book stores are being discounted to failure prices due to increase in digital format, competitive pressures and unknowns of the future but I think this is a bit ridiculous. 

The yield is current 3.95% working out to 0.44 cents per share annually. The market capitalization is being quoted at 280.7M or 11.10 per outstanding share. The crazy part of the valuation is that 314.69M is in cold hard cash and another 242M in inventories. 

The balance sheet has 361M in shareholder equity or 14.27 per share of Book value. 
Current Ratio: 1.67
Quick Ratio: 0.97 
Price to Cash flow: 4.6
Price to Sales: 0.3

Assets = 717.72M with 588.22M current (inventory + cash + accounts receivable + pre-paid expense)
Liabilities = 356.7M although 351.42M is current (272.2M accounts payable and 63M in un claimed gift card liability)

5 year average revenue growth 1.31%
5 year average net income growth 25.3%
5 year EPS average growth 25.06%

I estimate 2013 EPS ex items to be in the 1.35-1.60 x 25.2M shares (34M or 8.23 P/E) range which is discounted to the 5-year historical average of 12.8P/E and also implies “no growth under 8.5 P/E” but Indigo is not losing money on an annual basis, actually slightly growing.

Using a very conservative 4% annual net income increase I calculate the following.

V = EPS x (8.5 + 2g)
V = 1.35 x  16.5 = $22.27 intrinsic value.
(50% discount to current price and opportunity for 100% increase)

This company can not be monitored on a quarter to quarter basis due to the nature of the seasonality in the business and must be viewed on an annual basis.

idg

All Investors must conduct their own due diligence or contact a trusted financial advisor, my research provided is not investment advise and should be used for educational purposes.

Disclosure: I am long easyhome.

Now Save The Tax From Mr. Tax Man!

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