|Shares Out. (in M):||18||P/E||9.4||0|
|Market Cap (in $M):||490||P/FCF||8||0|
|Net Debt (in $M):||64||EBIT||49||0|
|TEV (in $M):||510||TEV/EBIT||10.5||0|
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ISC or Informational Services Company (TSX: ISV) is a Saskatchewan focused, Canadian software data provider of— search, registry, and information management for government, public, and private sectors for land titles, liens, survey property, collateral, KYC, and due diligence.
A crucial aspect of ISC is its registry segment which brings in consistent cash flow. Registry Operations are under a 20-year master service agreement which lasts until 2033— granting ISC as exclusive provider for the land registry of Saskatchewan. The Registry segment consistently generates 80-85% of stable cash flow from land title transactions despite not having growth.
Growth has been fueled by management’s disciplined acquisitions in the Services and Technology Solutions sector. So far management has not acquired indiscriminately and has kept buying boring, sticky, and essential software companies in complementary areas to its business— collateral and debt recovery (Paragon), and KYC/compliance solutions (ESC/SecureFact).
ISC was originally a Crown (owned by the federal or provincial government) corporation in Canada. On May 30, 2013, ISC converted from a Crown to a Saskatchewan corporation. On July 9, 2013— ISC went public.
Annually, ISC generates a revenue of CAD 130-136M with 30-40 million in free cash flow. Of the 36M generated in free cash flow in 2020, 14M is distributed as dividends. Being a software company— ISC only has a maintenance capital expenditure of around CAD 2-4M annually, and there isn’t marginal cost for extending its reach to an additional customer unless it is project based.
Employee and administrative expenses make up 38-42% of total expenses (400 employees which requires 40 million), while COGs make up 28-30% at 31M, and depreciation and amortization make up 19-20%, respectively. Total expenses add up to about 105 million per year.
As of September 2021, ISC’s consolidated operations had a free cash flow margin of 37%, while previous years ranged from 13-26%. Return on invested capital from 2016 to 2021 averages 13% and the company’s debt to equity is 48%.
As of June 2021, ISC maintains a working capital of 28-35M and keeps an additional 50M in cash— this provides a safe margin for any immediate payables and ensures adequate liquidity for payables or debt obligations. To facilitate acquisitions and pay off old debt, ISC has entered into a new credit agreement to expand their credit facility from 80M to 150M.
Of the 64M of debt, 88% (56M) is long term debt, with 71M drawn from the credit facility as of June 2021. 94M remains undrawn from the credit facility. RBC Capital Markets and Canadian Imperial Bank of Commerce are Joint Lead Arrangers and Bookrunners.
7.6M are from lease liabilities.
ISC has 3 business segments—
The Registry segment makes up 52% of Revenue or 70M; it also contributes to the bulk (81%) of operating earnings— 32M out of a total of 38M. This segment’s cashflow is reliable but growth is stagnant.
Registry Operations are divided into 3 parts— Corporate Registry, Land Registry, and Personal Property Registry. Land Registry segment makes up the bulk of operations— CAD 45-50M is generated from Land Registry titles, while the remaining 15-20M comes from personal property (think automobiles, etc.) and corporate registry. Revenue for Saskatchewan Corporate Registry was 2.7 million with 75,358 active businesses registered.
Within the Land Registry Operations, land survey directory and geomatics only contributes 6% to segment revenue, while Land Titles make up 94%.
Demand for operations comes from lands transfers and mortgage registrations. Overall transaction volumes for Land Titles are shrinking— with 816,367 transactions in 2018 to 710,411 transactions in 2020. Inflation of average land values slightly offset the decline in volume.
Approximately 30% of transactions come from the general public, while 70% is comprised of large institutions such as governments, developers, surveyors, and law firms. “High value” is deemed as a property registration transaction which generates a revenue of 10k. 84 percent of all land titles registrations were done online. Registrations are mainly value-based fees— with 0.3% of the land title’s value. Standard land title searches are about CAD 11 per search.
Real Estate transaction activity in Saskatchewan is the biggest driver of ISC’s performance, and won’t be obscured by technological obsolescence. Typically factors which affect Registry operations are interest and mortgages rates are. Land titles normally have the most transactions in the 2nd and 3rd quarters. When segments such as compliance and collateral management software start to contribute more to ISC’s bottom line, cash flows will be even more stable and less cyclical.
In Canada, if you’re looking to start a business, you have to file a Nuans (stated as ‘New-ons’) report. A NUANS or Name Search is a unique databank to Canada that provides a listing of available existing corporate names, business registrations and trademarks. Typically, each province charges a different fee, but the range is around CAD 45-86.
ISC has recently launched a more streamlined platform— Registry Complete, with API service offerings— to consolidate all registries and ministries under a cloud platform which makes work for law firms significantly easier.
ISC’s future growth comes from Services and Technology solutions, services generate 40-44% of revenues (56M), with growing operating earnings. Operating earnings have not grown to a substantial size to move the needle (still marginal at 2.79 to 4.8M), but it soon will with its current rate of growth (>30% per year).
In 2017, Services generated 15M in revenue and 80-90k in net income.
By year end 2020, revenue from services has grown to 56M, while operating income was 2.79M after depreciation and amortization and adjustments to acquisitions. This translates approximately a threefold increase of earnings within this segment in 3 to 4 years. A 25% growth in revenue, or a jump from 56M to 70M, will result in operating earnings of 18-20M. I think this assumption of growth is conservative and attainable.
However, expenses excluding D&A are higher (44M) compared to Registry Operations (35M). In addition, depreciation and amortization is higher for services at 7-8M, compared to the registry segment at 2.4-2.5M.
The Services segment was mainly built through its wholly owned subsidiary ESC Corporate Services Ltd. (formerly named SecureFact) by acquiring substantially all of the assets of SecureFact Transaction Services, for CAD 6.8M, by way of an asset purchase agreement.
ESC (https://www.securefact.com/) helps companies with background searches on individuals through the SIDNI platform, and verifies firms through software such as Legal Entity Validator and Attestanet. Security searches include information on debts and liabilities, pending and potential lawsuits, bankruptcy, liens, and sales of assets. By utilizing public records, ISC provides valuable data with KYC solutions. With the advent of cryptocurrency, verification of crypto-customers brings in new growth.
On July 31, 2020, ISC acquired Paragon for CAD 70M— Paragon is the second largest software which facilitates asset recovery for Eastern Canada’s major banks. Paragon contributes to 12M in revenue and roughly operating earnings of around 5-6M with roughly 53 staff.
Paragon complements previously purchased AVS systems. AVS provides automation software to serve lending, leasing and credit issuing businesses and institutions. Asset recovery retrieves data of collateral assets such as cars, boats, aircraft, etc.
Technology solutions encompass sale of software licenses and monthly maintenance services which makes up 10% of ISC’s revenues at 10M.
This segment diversifies ISC’s operations geographically beyond Canada— Ireland (through acquisition and from an aviation contract) and the U.S. (Ohio & Missouri).
Projects include a cooperation with Irish Aviation Authority to implement a new Safety Regulation System and to help Ireland build and replace and support all CRO registry systems.
In addition, ISC was also awarded a contract on Dec 2020 for the islands of Bonaire, St. Eustatius and Saba. Within Canada, for ISC's contracts— Nova Scotia made an agreement to replace technology of its registry, in particular, its Joint Stock Companies. For Yukon, ISC helped the region convert its Land Title registry to an electronic system.
In 2021, Jeff Stusek, ISC’s longtime CEO, steps down— with CFO Shawn Peters replacing him.
Shawn should retain the culture Jeff built. I don’t expect him to lack capital allocation discipline— ISC has had 5 acquisitions in the last 5 years that were complementary and prudent (not an excessive amount paid) and allowed for future expansion in a different geography.
Management is well incentivized through Share Appreciation Rights and Performance share units which is measured through ROIC targets. Share Appreciation Rights uses the Black Scholes options formula, while Performance share units uses a multiplier that ranges from 0-150% based on ROIC.
At a market cap of 480-490M, ISC is just under half a million, and FCF is likely (but not necessarily or certainly) to jump up to 80-100M or double in less than 5 years (>15%CAGR).
The most important quality to ISC is its rock-solid Registry operations through the Masters Services Agreement— a maintenance fee of only half a million a year guarantees a bulk of annual cashflow. This cushion allows management to expand into interesting and complementary operations for growth. Whether management can maintain proper discipline is the key question.
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