Information Services: Aggregate High Margin Registry Services (IRMTF)

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Information Services Society (OTCPK: IRMTF) (TSX:ISV:CA) is a niche Canadian small-cap business services company pursuing a roll-out strategy in the land and commercial registry space. Margins in the business are exceptional and ISV has shown expertise in the acquisition and integration of complementary businesses. The company is currently trading at an attractive multiple of 13.1x Fwd P/E with a dividend yield of 4.3%. I think investors can patiently hoard stocks when the market is too preoccupied with a housing downturn.

As ISV is a Canadian company, all financial figures, unless otherwise stated, will be expressed in Canadian dollars.

Company presentation

Information Services Corporation is a provider of registry and information management services for public data and records.

ISV was originally a Crown corporation, called Saskatchewan Land Information Services Corporation, licensed to provide land registration and other government services in the Canadian province of Saskatchewan. In 2013, the company was privatized and converted into a regular company and went public on the Toronto Stock Exchange at $14/sh, generating gross proceeds of $147 million.

ISV’s primary business strategy is to acquire and develop businesses complementary to its core cadastre business. Since going public, ISV has made a number of growth acquisitions, including the 2015 acquisition of ESC Corporate Services Inc. (a provider of corporate registries and services in Ontario and around the world), the 2017 acquisition of Enterprise Registry Solutions (registry services in Ireland), and the 2020 acquisition of Paragon Inc. (an asset recovery firm that works with major Canadian banks), to name a few only a few.

Today, ISV has three main business segments: Registry Operations, Services, and Technology Solutions (Figure 1). Registry is the largest business segment with 51% of revenue of $169 million in 2021, while services accounts for 44% of revenue and technology solutions 5%.

activity area

Figure 1 – ISC Business Segments (ISC 2021 Annual Report)

finance

The ISV business has high margins and generates strong free cash flow, as shown in Figure 2. 2021 EBITDA margins were 35.7%, an increase of 4% from 31, 7% of 2020. The net profit margin was also strong, at 18.9% in 2021 compared to 15.2% in 2020.

financial summary

Figure 2 – ISC Financial Summary (ISC Annual Report 2021)

Consistent deployment model

What’s most impressive about ISV’s business model is the consistency of its results. Since the 2013 IPO, revenue has grown at a CAGR of 10%, driven by acquisitions in the services segment, funded by steady cash flow from the Saskatchewan registry business (Figure 3) .

increase in income

Figure 3 – Revenue growth through acquisitions (ISC Investor presentation)

EBITDA and free cash flow (“FCF”) have evolved in line with revenues, from $31 million EBITDA and $23 million FCF in 2013 to $61 million EBITDA and $45 million FCF dollars in 2021 (Figures 4 and 5). As most registry and ancillary services have gone virtual, COVID-19 has had minimal impact on ISV’s financial results.

EBITDA

Figure 4 – EBITDA Growth (ISC Investor Presentation)

FCF Growth

Figure 5 – Growth of FCF (presentation of ISC investors)

2020 Paragon acquisition sparked investor interest

ISV was a sleepy stock until its acquisition of Paragon in July 2020 for $70 million, which sparked interest from analysts and investors. Paragon was a strong strategic fit, providing the ESC segment with a full credit lifecycle offering (from origination to collection and asset recovery), while being accretive to both earnings and cash flow . As shown in Figures 3 and 4 above, the addition of Paragon increased the ISV’s revenue growth rate, while helping to increase the EBITDA margin from 29.3% in 2019 to 35 .7% in 2021.

Investors cheered the acquisition, taking the stock from a pre-trade price of around $13 to over $32 per share by July 2021 (Figure 6).

stock chart

Figure 6 – ISV investor interest surged after Paragon acquisition (StockCharts.com)

However, the stock began to decline in Q3/2021 as the company noted that the extraordinary activity in Saskatchewan’s real estate sector may not be sustainable. In February 2022, the company also released full-year guidance of $168-173 million in revenue and $48-53 million in EBITDA, which is flat on revenue and declining. of 17% over one year on EBITDA, resulting in a further drop in the share price.

Recent quarters have allayed some fears

Despite the cautious forecast published in February, the actual performance of the first two quarters of 2022 was much better than expected.

YTD, ISV generated revenue of $95 million (13.4% year-over-year growth) and an EBITDA margin of 36.1% (Figure 7). Diluted EPS was $1.07, up nearly 60% year-on-year. On an LTM basis, revenue is $181 million. Along with the second quarter results, management also updated its guidance for 2022 to $188-193 million in revenue and EBITDA of $59-64 million.

Year-to-date 2022

Figure 7 – ISC YTD 2022 Condensed Financial Data (ISC Q2/2022 Management Report and Analysis)

As for the outlook, the company expects registry activity to return to pre-pandemic levels but above 2019 levels. Services are expected to continue to grow, especially as asset recovery activity will see increased demand as the economy eases. Finally, Technology Solutions is expected to return to normalized activity levels as governments resume regular procurement activities.

The current assessment is undemanding

ISV is currently trading at an enterprise value of $470 million. Versus EBITDA guidance of $61.5m (midpoint), or 7.6x Fwd EV/EBITDA. On an earnings forecast of $31m or ~$1.76/sh, ISV is trading at a Fwd P/E of 13.1x. Both measures are reasonable and undemanding. For reference, high-margin real estate services peers such as Altus Group (OTCPK:ASGTF) (AIF:CA) and Real Matters (OTCPK:RLLMF) (REAL:CA) are trading at 20.0x Fwd EV/EBITDA and 35 .3x Fwd EV/EBITDA respectively and neither company can match the EBITDA margin of around 36% ISV.

ISV is also offering a generous dividend of $0.23/qtr (4.3% current yield) which has been paid out consistently since the IPO (Figure 8) and appears to be well covered by earnings and growth forecasts. ‘EBITDA.

ISV constant dividend

Figure 8 – ISV has always paid dividends (Seeking Alpha)

Risks

The greatest risk for ISV is a continued deterioration in the Canadian housing market, particularly in Saskatchewan, where ISV provides land registration and other related services. However, investors are cautioned not to be too negative about registry activities, as they generally charge a flat fee that increases periodically and suffers no credit loss due to a real estate downturn. The impact will mainly be felt through lower trading volumes.

Additionally, ISV’s services segment, led by Paragon’s recent asset recovery business (think automatic repossession), could actually benefit if the Canadian real estate market weakens, as demand of asset recovery services will increase in a weak economy.

Conclusion

Information Services Corporation is an interesting Canadian small-cap business services company that pursues a deployment strategy in the land and commercial registry niche. Margins in the businesses are exceptional and ISV has demonstrated proficiency in acquiring and integrating complementary businesses such as Paragon’s recent asset recovery business. The company is currently trading at an attractive multiple of 13.1x Fwd P/E and pays a well-covered dividend of 4.3%. I think investors can patiently hoard stocks at cheap valuations when the market is too preoccupied with a housing downturn.