Timbercreek Financial Corp. (TSX: TF) is a leading non-bank, commercial real estate lender providing shorter-duration, structured financing solutions to commercial real estate investors. 

Q1FY20 Financial Highlights: Timbercreek came up with a stable set of numbers, wherein the Group reported net investment income of CAD 24.08 million, slightly down from CAD 24.51 million in the previous corresponding period. The decline was primarily attributable to lower interest income and a fair value adjustment, partially offset by increased lender fee income. Income from operations stood at CAD 20.28 million, down from CAD 20.73 million in Q1FY19, due to a higher general and administrative expense and servicing fees, while partially offset by diminishing management fees coupled with a slide in the allowance for expected credit loss. Total financing costs stood at CAD 12.86 million, significantly higher from CAD 8.01 million in the previous corresponding quarter, primarily attributable to inclusion of fair value loss on derivative contract amounting CAD 5.80 million. Apart from this, financing cost on credit facilities and financing cost on convertible debentures stood at par with the Q1FY19. Net income and comprehensive income shrank to CAD 7.42 million, as compared to CAD 13.13 million in Q1FY19. The group paid a monthly cash dividend of CAD 0.0575 per common share.

Q1FY20 Income Statement Highlights Source (Company Reports)

Risk: COVID-19 pandemic took a toll on the economy and containment measures are likely to result in higher unemployment rate and lower purchasing power. Following the current scenario, the group might face a delay in repayment or default from its customers in the near term.

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

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

Stock Recommendation: The stock of TF corrected ~12% so far this year amid a stiff correction in the broader equity market due to the COVID 19 pandemic crisis. Despite the challenging environment, the group’s operating metrics remained strong, and there was a negligible impact on the interest and principal payments for April 2020. TF reported ~98.4% of interest payment for the month of April 2020, stood as per with the historical collection rates, which is impressive considering the current scenario of the temporary closure of most of the businesses. The group has not witnessed any sign of deterioration in its portfolio to date. The group mentioned that only 2% of the customers have requested for payment deferral. The group expects that some of the loans coming due would likely have to be extended. However, extend loans would generate fee income for the business. At the last traded price, the stock is offering a dividend yield of 7.9%, which is attractive amid the lower interest rate environment. The Company has strong liquidity and can borrow CAD 500.0 million through its credit facility. The stock witnessed a pull-back rally and appreciated ~35% in the last three months and traded above the 50-days and 100-days SMA of CAD 8.09 and CAD 8.44, respectively, which indicates a medium-term bullish pattern. We have valued the stock using Price to Book based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Fiera Capital Corp (TSX: FSZ), Genworth MI Canada Inc (TSX: MIC), and Equitable Group Inc (TSX: EQB) etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 8.70 on June 23, 2020.

TF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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