Crown Capital Partners Inc (TSX: CRWN) is a specialty finance company that provides capital to middle-market companies. The firm offers long-term financing and special situation financing. It provides tailored financing solutions with minimal or no ownership dilution. Its financing solutions include subordinated term and bridge loans, perpetual debt, income streaming, and royalties. The company operates through two segments namely, Specialty finance and Network services.

Revenue Mix

Source: Kalkine Group, Annual Report

Investment Rationale

• Solid Top-line Performance in the Second Quarter of FY20: The company’s revenue increased 21% to CAD 13.3 million from CAD 11.0 million in Q2 2019, driven by higher interest revenue and the addition of the network services business. Interest revenue was CAD 7.2 million, up 26% compared to CAD 5.7 million in Q2 2019, reflecting the growth of Crown Partners Fund and initial contributions from Crown Power Fund.
• Adjusted Funds from Operations (AFFO) Increased Strongly in Q2FY20: The company’s adjusted fund from operations improved significantly in the second quarter of 2020 and recorded a growth of 81% on a YoY basis.

Source: Company Presentation

• Increased Insider Buying: The insiders have increased stake in the company four times so far this year. And all the buy transactions done by insiders are after the stock price crash. This implies that insiders are bullish on the group’s future performance and using the recent crash as an opportunity to buy shares at a discounted price and valuation.

Insider Transaction Over YTD. Source: Refinitive (Thomson Reuters) 

• Gaining Technical Strength: At the last closing price of CAD 4.30 (on October 20, 2020), shares of CRWN traded above the crucial short-term moving average of 50-day SMA and traded above the other short-term support levels of 10-day, 20-day and 30-day SMAS. Also, the MACD is rising and hovering above its 9-day SMA signal line, with the difference between 12-day, and 26-day EMAs is positive, which is another bullish technical indicator.

Technical Price Chart. Source: Refinitiv (Thomson Reuters)

• Relative Price Strength: Over the past three months, shares of Crown Capital Partners have significantly outperformed the benchmark TSX Composite index by 33%. The stock has outperformed the index over the past one month and 5-day as well.

3-Months Relative Price Performance (CRWN vs TSX Composite). Source: Refinitiv (Thomson Reuters)

• Risk Associated to Investment: The group is exposed to default risk as hardship created by COVID-19 may result in non-payment of loans by the borrowers. Further, the group is exposed to interest rate risk, and any volatility in the interest rate would affect the interest income.

Q2FY20: Financial Highlights

Source: Company Presentation

• During the second quarter under consideration, the company’s total revenue increased 21% to CAD 13.3 million against CAD 11.0 million in Q2 2019, mainly on account of increased interest revenue and the addition of the network services business.
• Interest revenue for the Q2FY20 was at CAD 7.2 million, up 26% compared with CAD 5.7 million in Q2 2019.
• Adjusted Funds from Operations increased to CAD 3.6 million, up 81% from CAD 2.0 million in Q2 2019
• Net loss came in at CAD (1.6) million (Q2 2019 – net income of CAD 2.3 million), or CAD (0.17) per common share (Q2 2019 – net income of CAD 0.23 per share). The net loss for the current period mainly reflects a provision for credit losses of CAD 3.9 million that is primarily in respect of the loan in PenEquity Realty Corp.
• Total assets increased to CAD 324.9 million at quarter-end, compared with CAD 299.7 million on December 31, 2019, driven by net additions to each of investments and distributed power equipment under development.

Source: Company Presentation

• Total equity as at June 30, 2020, was CAD 93.0 million, or CAD 9.90 per basic share.
• Crown Power Fund established a new relationship with a seventh operating partner which is primarily focused on providing distributed power solutions to commercial end-users in Eastern Canada.
• Crown Partners Fund advanced an additional CAD 5.0 million to CareRx (formerly Centric Health Corporation) under its CAD 30.0 million loan commitment, increasing this loan to CAD 27.0 million.
• On June 30, 2020, the company’s Alternative Corporate Financing investments stood at CAD 264.6 million, including Special Situations Financing investments of CAD 227.5 million and Long-Term Financing investments of CAD 37.1 million. The company’s Special Situations Financing investments are managed through Crown Partners Fund, in which Crown holds an approximate 39% interest.
• In the group’s distributed power business, their priorities for 2020 include building assets in the Crown Power Fund and securing additional third-party funding commitments to finance additional projects. The company presently see only minimal financial impacts of the COVID-19 pandemic on the financial performance of their power generation assets or opportunities. The pipeline of potential transactions, including prospective projects already in the planning stage, and now stands at approximately CAD 200 million. The group continue to build their base of operating partners, with seven developers now involved. In June 2020, Crown Power Fund established a relationship with, and partial ownership in, an additional third-party operating partner focused on Eastern Canada.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 54.98% of the total shareholding. Edge Point Investment Group Inc. and Gillis (C Robert) are among the top shareholders in the company, with an outstanding position of 17.67% and 9.99%, respectively. Institutional ownership in the company stood at 23.75%, and strategic ownership stood at 34.23%, respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): Price to Book Value Based Valuation Metrics

All forecasted figures have been taken from Refinitiv (Thomson Reuters) 

Peer Comparison

Source: Refinitiv, Thomson Reuters

Stock Recommendation: The group’s performance in the second quarter of 2020 was decent, with interest revenue jumps 26%, total revenue zoomed 21%, and Total assets increased to CAD 324.9 million at quarter-end, compared with CAD 299.7 million at December 31, 2019.

Further, increasing insiders buying amid challenging times is a good sign for the existing and potential shareholders’ perspective. This shows that management is bullish on the group’s prospect.

Further, from the technical standpoint, at the last closing price, shares of CRWN traded above the crucial short-term moving average of 50-day SMA and traded above other short-term support levels of 10-day, 20-day and 30-day SMAS. Also, the MACD is rising and hovering above its 9-day SMA signal line, with the difference between 12-day, and 26-day EMAs is positive, which is another bullish technical indicator.

However, a range of risks are hovering over the company’s future performances. The primary risk factor for Crown Partners Fund is credit risk, being the potential inability of one or more of the 11 portfolio companies to meet their debt obligations to Crown Partners Fund.

Therefore, based on the above rationales and valuation, we have given a “Speculative Buy” recommendation at the closing price of CAD 4.3 on October 20, 2020.

1-Year Price Chart (as on October 20, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at October 21, 2020 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.