Information Services Corporation

Information Services Corporation (TSX: ISV) is a Canada-based provider of registry and information management services for public data and records.

Key Highlights:

• Consistent Dividend Payment: Historically, the company reported a stable dividend payout backed by stable cash flows. Amidst the current downturn, the company’s total dividend payment in FY20 remained uninterrupted at CAD 14 million, v/s FY19. Moreover, at the last closing price, the stock is offering a dividend yield of ~3.33%, which is decent amid a low interest rate environment.

                 Dividend History. Source: Refinitiv (Thomson Reuters)

• Better than Industry Margin: The company reported a robust margin during Q4FY20 v/s the industry median, which indicates higher operational efficiency. EBITDA margin and Operating margin stood at 40.2% and 30.4%, respectively, in Q4FY20, as compared to 11.6% and 9.3% of the industry median. Moreover, the company’s net margin stood at 20.2%, significantly above the industry median of 2.8%.

• Balanced portfolio in technology service segment: Earlier in FY18, the company used to derive the majority of the segment income from Internal related parties, which has resulted in a dependence on that particular stream. However, in FY20, the company reported a balanced portfolio and lowered its dependence on each stream, which is a key positive.

              Source: Company Report

FY20 Financial Highlights:

• ISV announced its full-year result, wherein the company posted revenue of CAD 136.723 million v/s CAD 132.968 million in FY19. The increase was driven by higher income from the Services segment (CAD 56.398 million v/s CAD 51.131 million in FY19).
• Total expenses stood at CAD 105.976 million, increased marginally from CAD 105.342 million in FY19. Adjusted EBITDA stood at CAD 47.498 million, increased 19% over FY19.
• Net income was recorded at CAD 20.883 million, improved from CAD 19.400 million in FY19.
• The group reported its free cash flow at CAD 36.235 million v/s CAD 29.996 million in FY19.
• The company reported a cash balance of CAD 33.946 million, while total assets were recorded at CAD 242.300 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks: The company reported a surge in the total debt at CAD 87 million, significantly higher than CAD 28.3 million and CAD 32.3 million in Q2FY20 and Q1FY20, respectively. Higher debt could dampen the overall financial flexibility and lead to a higher interest cost.

Valuation Methodology (Illustrative): Price to Earnings

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

Despite the current economic turmoil, the group reported a higher top-line and a growth in free cash flows during FY20, which is impressive. The company’s long-term strategy remains centred on delivering value for shareholders through the consistent performance of the existing business and the execution of appropriate growth opportunities, including acquisition targets. The group expects lower volume in Registry Operations and Services segments. However, the group expect the strong EBITDA margin profile of the recently acquired Recovery Solutions division in Services segment to positively impact consolidated EBITDA margin profile in 2021. In the Technology Solutions segment, project implementation work continues for multiple clients. However, some ongoing implementations which were delayed due to the pandemic are now expected to be completed in 2021. We have valued the stock using the P/E based relative valuation method and have arrived at a single-digit downside (in percentage terms). For the said purposes, we have considered peers like Altus Group Ltd, Open Text Corp etc. Considering the aforesaid facts, we give a ‘Watch’ stance on the stock of ISV at the closing price of CAD 24.00 on March 30, 2021 and would recommend investors to wait for a better entry point.

One-Year Price Chart (as on March 30, 2021). Source: Refinitiv (Thomson Reuters)

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