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Message: Starting to LOOK like these People made a Good Call...
Industrial Alliance
EVENT
CXS is expected to release Q1/13 results during the week of May 13th. We
forecast continued ops. EPS of $0.02 excl. f/x. Prior year data is not
comparable as it includes Counsel RB, KBCP, Real Estate and Case Goods
segments that have most likely been classified as assets for sale/discontinued
as of Q1/13.
HIGHLIGHTS
? Strong Volumes: We expect Street to contribute $25.8m vs. $24.2m last
year. We expect comparable QoQ originations of $1.58b despite a market
slowdown in insured volumes of ~15%. The combination of ING exiting
the broker channel, a reduction of broker compensation at First National,
and a more attractive compensation for brokers at Street will most likely
push market share beyond the Q4 level of 9.6% vs. 8.1% in Q1/12.
? Offset by Weaker Spreads: We expect net gain spreads of 43bps, lower
than 51 bps in Q4/12 as spreads in the industry come down to the lower
end of the historical range due to declining concern over Euro debt crisis
vs. last year and higher competition (BMO 2.99% 5yr Fixed). Sweeteners
to attract ING broker business will pressure margins, but market share
gains should be significant. We forecast Street’s adj. pre-tax earnings of
$4.4m vs. $6.8m last year.
? Corporate Burn: We will also monitor the corporate burn excluding
discontinued lines. We expect an annualized decline of ~$4.0m to $6.5m
after tax, which includes $2.5m in interest expense, $0.6m in depreciation
and amortization, $1.0m in public company costs, and $1.0m in accrual
for Street Capital’s earn-out.
? Special Items: We expect bank license application costs at Street of
$500k to $1.0m in Q1/13 (non-recurring) to end this quarter. CXS might
incur some additional corporate charges for the asset disposal process.
? Fleetwood: Despite a $5.7m goodwill impairment in Q4/12, we expect a
QoQ recovery due to sales timing, making the asset easier to sell.
RECOMMENDATION
We continue to rate CXS as our TOP PICK and maintain our 12 month
target price of $2.70 based on our SOTP valuation. The drop of 13% from
$1.85 since May 1st presents an attractive entry point as CXS will pay little
cash taxes; has huge margin catalysts beginning in 2014; might introduce a
dividend policy; makes debt repayments; and dividend-out RB shares.
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