Genworth MI Canada Inc.

Genworth MI Canada Inc. (TSX: MIC) is one of the leading private-sector residential mortgage insurers in Canada and offers mortgage default insurance across the region. The Company has built a broad underwriting and distribution platform across the country that provides customer-focused products and supports services to the residential mortgage lenders and originators.

The Company informed it would disclose its second quarter FY20 result on August 06, 2020.

Q1FY20 Financial Highlights: MIC declared its quarterly results, wherein the Company reported a flat Premiums Earned of CAD 171 million, up 1% on y-o-y basis. The performance was negatively impacted by CAD 2.1 billion of unearned premiums reserve. Total Premiums Written grew 8% on y-o-y basis to CAD 114 million. The Company reported premiums written from transactional insurance at CAD 110 million, indicating a growth of 10% on y-o-y basis, primarily due to an increase in the new insurance written. New delinquencies, net of cures, stood at 284, indicating a downfall of 121 from the previous corresponding period, due to a decrease in Alberta (46), Ontario (38), the Atlantic region (19) and Quebec (17). The Company reported total expenses of CAD 37 million during the quarter, which indicates an expense ratio of 22% of the premiums earned as compared to the Company's expectation of 18% to 20%. The increase was majorly attributable to a higher share-based compensation expense due to the adverse impact of the Company's lower share price on its share-based hedging program. At the end of the quarter, the market value of the Company's investment portfolio stood at CAD 6.1 billion. MIC reported its net income at CAD 95 million, down 3% on y-o-y basis, due to a higher level of realized and unrealized losses from investments, derivatives and foreign exchange, increase in expenses, and lower operating investment income, partially offset by higher premiums earned.

Q1FY20 Financial Highlights (Source: Company Reports)

Risks: Due to the current challenging environment, the Company’s insurance premium collection could be adversely impacted, which might result in a lower ‘premium earned’ in the coming quarters.

Valuation Methodology: Price to Book Based (Illustrative)

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

Stock Recommendations: The stock of MIC corrected ~37% so far this year, due to weak investors’ sentiment across the global equities due to the COVID 19 pandemic. The Company has a strong business model and focuses on disciplined risk management and proven loss mitigation strategies, which ensures a stable business performance. The Management recently commented that the Company is likely to retain its underwriting policy related to debt service ratio limits, minimum credit score and down payment requirements amidst a sectoral softness, which is likely to boost the business as the competitors are changing their guidelines according to challenging market conditions. The Group anticipates an increment within the portfolio insurance segment in the coming quarters, which is a key positive. Further, the stock is offering a dividend yield of ~6.6%, which is lucrative in current interest rate environment. We have valued the stock using Price to Book value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (Financials) median on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 32.88 on July 23, 2020.

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

Timbercreek Financial Corp.

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.  The Company invests directly in a diversified portfolio of structured mortgage loans primarily secured by stabilized, income-producing commercial real estates, such as multi-residential, office and retail buildings located in urban markets across Canada. 

Q1FY20 Financial Highlights: TF declared its quarterly results, wherein the Group posted net investment income of CAD 24.08 million, marginally down from CAD 24.51 million, a year ago. The decline was primarily attributable to lower interest income and a fair value adjustment, partially offset by higher lender fee income. The Group reported income from operations of CAD 20.28 million, down from CAD 20.73 million in the previous corresponding period (pcp). The slight decline was due to a higher general and administrative expense and servicing fees, partially offset by diminishing management fees combined with a fall in the allowance for expected credit loss. Total financing costs were reported at CAD 12.86 million, significantly higher from CAD 8.01 million as compared to the previous corresponding quarter, primarily attributable to the inclusion of fair value loss on derivative contract amounting to CAD 5.80 million. Net income and comprehensive income shrank to CAD 7.42 million, as compared to CAD 13.13 million in the previous corresponding quarter. 

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: COVID-19 pandemic took a toll on the economy, and containment measures are likely to result in a 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: Price to Book Based (Illustrative)

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

Stock Recommendation: Due to a weak investor’s sentiment, the stock corrected ~15% so far this year. Amidst, the current challenging time, the company’s performance remained stable, which is encouraging. The company reaffirmed that the performance of the business is likely to remain unaffected, which is a key positive. TF reported ~98.4% of interest payment for the month of April 2020, stood at par with the historical collection rates, which is impressive considering the current scenario of the temporary closure of most of the businesses. 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. Further, the company’s portfolio is well managed and diversified as it caters both retail and corporate customers. Further, the stock of TF carries a lucrative dividend yield of ~8.19%, which is encouraging from an income investor’s point of view. We have valued the stock using Price to Book value-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 Genworth MI Canada Inc, Equitable Group Inc, Fiera Capital Corp etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 8.45 on July 23, 202

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

*Please be aware that dividends are variable and not guaranteed.

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.