AndreyPopov/iStock via Getty Images
AndreyPopov/iStock via Getty Images
Information Services Corporation (OTCPK:IRMTF) (TSX:ISV:CA ) is a niche Canadian small-cap business services company pursuing a roll-up strategy in the land and business registry space. Margins in the businesses are outstanding and ISV has shown skill in acquiring and integrating complementary businesses. The company currently trades at an attractive 13.1x Fwd P/E multiple with a 4.3% dividend yield. I think investors can patiently accumulate shares while the market is overly concerned with a real estate slowdown.
As ISV is a Canadian company, all financial figures, unless specified, will be expressed in Canadian dollars.
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, chartered to provide land registry and other governmental services in the Canadian province of Saskatchewan. In 2013, the company was privatized and converted into a regular corporation and went public on the Toronto Stock Exchange at $14/sh, raising gross proceeds of $147 million.
ISV's main corporate strategy is to acquire and develop complementary businesses to its core land registry business. Since going public, ISV has made a number of growth acquisitions including the 2015 acquisition of ESC Corporate Services Inc. (a provider of business 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 the major Canadian banks), just to name 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 2021 revenues of $169 million while Services account for 44% of revenues and Technology Solutions account for 5%.
Figure 1 - ISC business segments (ISC 2021 Annual Report)
Figure 1 - ISC business segments (ISC 2021 Annual Report)
ISV's businesses have high margins and generate strong free cash flows as shown in Figure 2. 2021 EBITDA margins were 35.7%, a 4% increase from 2020's 31.7%. Net Income margin was also strong was 18.9% in 2021 vs. 15.2% in 2020.
Figure 2 - ISC financial summary (ISC 2021 Annual Report)
Figure 2 - ISC financial summary (ISC 2021 Annual Report)
What is most impressive with ISV's business model is the consistency in its results. Since the 2013 IPO, revenues have grown at a 10% CAGR, driven by acquisitions in the Services segment, funded by consistent cash flows from the Saskatchewan registry business (Figure 3).
Figure 3 - Revenue growth through acquisitions (ISC Investor Presentation)
Figure 3 - Revenue growth through acquisitions (ISC Investor Presentation)
EBITDA and Free Cash Flows ("FCF") have scaled along with revenues, from $31 million in EBITDA and $23 million in FCF in 2013 to $61 million in EBITDA and $45 million in FCF in 2021 (Figures 4 and 5). As most registry and ancillary services have gone virtual, COVID-19 had minimal impact to ISV's financial results.
Figure 4 - EBITDA growth (ISC Investor Presentation) Figure 5 - FCF growth (ISC Investor Presentation)
Figure 4 - EBITDA growth (ISC Investor Presentation)
Figure 5 - FCF growth (ISC Investor Presentation)
ISV had been a sleepy stock until its July 2020 acquisition of Paragon for $70 million that ignited some analyst and investor interest. Paragon was a strong strategic fit, providing the ESC segment with a complete credit life cycle offering (from originations to collections and asset recovery), as well as being accretive on both earnings and cash flows. As can be seen in Figures 3 and 4 above, the addition of Paragon added to ISV's revenue growth rate, as well as helping boost EBITDA margin from 29.3% in 2019 to 35.7% in 2021.
Investors cheered the acquisition, pushing the stock up from a pre-deal price of ~$13 to over $32 per share by July 2021 (Figure 6).
Figure 6 - ISV investor interest surged post Paragon acquisition (StockCharts.com)
Figure 6 - ISV investor interest surged post Paragon acquisition (StockCharts.com)
However, the stock started to soften in Q3/2021, as the company noted that the extraordinary activity in the Saskatchewan real estate sector may not be sustainable. In February 2022, the company also released full year guidance of $168 to $173 million in revenues and $48 to $53 million in EBITDA, which is flat on the topline and down 17% YoY on EBITDA, causing the stock to fall further.
Despite the conservative guidance issued in February, actual performance in the first two quarters of 2022 has been much better than feared.
YTD, ISV delivered revenues of $95 million (13.4% YoY growth), and EBITDA margin of 36.1% (Figure 7). Diluted EPS was $1.07, growing almost 60% YoY. On an LTM basis, revenues are running at $181 million. Along with the Q2 results, management also updated their 2022 guidance to $188 to $193 million in revenues and EBITDA of $59 to $64 million.
Figure 7 - ISC YTD 2022 condensed financials (ISC Q2/2022 MD&A Report)
Figure 7 - ISC YTD 2022 condensed financials (ISC Q2/2022 MD&A Report)
With respect to the outlook, the company expects the registry business to return to pre-pandemic levels, but above 2019 levels. Services is expected to continue to grow, especially as the asset recovery business will see increased demand as the economy softens. Finally, Technology Solutions is expected to return to normalized business levels as governments resume regular procurement activity.
ISV is currently trading at an enterprise value of $470 million. Relative to EBITDA guidance of $61.5 million (midpoint), that is 7.6x Fwd EV/EBITDA. On earnings guidance of $31 million or ~$1.76/sh, ISV is trading at a Fwd P/E of 13.1x. Both metrics are reasonable and undemanding. For reference, high-margin real estate business services peers such as Altus Group (OTCPK:ASGTF) (AIF:CA) and Real Matters (OTCPK:RLLMF) (REAL:CA) trade at 20.0x Fwd EV/EBITDA and 35.3x Fwd EV/EBITDA respectively and neither company can match ISV's ~36% EBITDA margin.
ISV also sports a generous $0.23/qtr (4.3% current yield) dividend that has been consistently paid since IPO (Figure 8) and appears well covered from earnings and EBITDA guidance.
Figure 8 - ISV has consistently paid dividends (Seeking Alpha)
Figure 8 - ISV has consistently paid dividends (Seeking Alpha)
The biggest risk to ISV is a continued deterioration in the Canadian housing market, particularly in Saskatchewan, where ISV provides land registry and other related services. However, investors are cautioned against being too negative on the registry business, as these typically charge a flat fee that increases periodically, and do not suffer any credit losses from a real estate slowdown. The impact will mostly be felt through lower transaction volumes.
Furthermore, ISV's Services segment, led by the recent Paragon asset recovery business (think auto repossession), may actually benefit if the Canadian real estate market weakens, as demand for asset recovery services will increase in a weak economy.
Information Services Corporation is an interesting Canadian small-cap business services company pursuing a roll-up strategy in the niche land and business registry space. Margins in the businesses are outstanding and ISV has shown skill in acquiring and integrating complementary businesses such as the recent Paragon asset recovery business. The company currently trades at an attractive 13.1x Fwd P/E multiple and pays a well-covered 4.3% dividend. I think investors can patiently accumulate shares at cheap valuations while the market is overly concerned with a real estate slowdown.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.