Exchange Income Corp.
Thursday’s close: $26.46
52-week trading range: $22.01 to $29.25 a share
Annual dividend: $1.68 a share for a yield of 6.5 per cent
Analysts’ ratings: There were six buys, three holds and no sells, according to Bloomberg data. Target prices ranged from $28.50 a share as estimated by Raymond James Ltd. analyst Steven Hansen to $37 a share by Stonecap Securities analyst Scott Rattee.
Recent history: Shares of the Winnipeg-based company, which owns aviation and specialty manufacturing businesses, have gained 14 per cent (including dividends) over the past year. Exchange Income buys companies with strong cash flow so that it can pay out a sustainable, and growing dividend. The former income trust, which had annual distribution of $1.08 a unit before converting to a corporation in 2009, has grown its payout to $1.68 a share. The company owns five regional airlines flying to remote communities. Last month, it closed a $74.2-million (U.S.) cash-and-stock deal to buy U.S.-based Regional One Inc., a provider of aircraft and engine parts to regional carriers. That price tag could grow to $83.5-million if its meets certain targets. Among its manufacturing companies, its biggest acquisition occurred in 2011 with the $79-million (Canadian) purchase of WesTower Communications, a U.S.-based maker and provider of cellphone towers.
Manager insight: Exchange Income is a yield play with potential upside from growth through a diversified array of acquisitions across North America, says Jeffrey Olin, president of Toronto-based Vision Capital. A 6.5-per-cent yield from a company with an expected payout ratio of below 70 per cent is “pretty compelling.”
Mr. Olin, who began his due diligence on the company in a former career as an investment banker and who has owned its shares personally for many years, bought more stock for his Vision Opportunity funds in 2010. In the interest of full disclosure, he said he agreed recently to become a member of Exchange Income’s board.
The purchase of Regional One is a potential near-term catalyst for the company’s stock because the acquisition is expected to add immediately to the bottom line, he said. The new subsidiary provides vertical integration for the company’s aviation business and will allow its regional airlines to source parts cheaper, he noted.
Exchange Income now has about $230-million mainly from an untapped credit line to buy more companies, and that will help Regional One with its future growth too, he said.
Another potential catalyst will come from improved profitability at its WesTower subsidiary, which is building and upgrading towers for AT&T in the United States, said Mr. Olin. “They’ve got a $500-million contract, which has since expanded to include California...That has created some operating stresses.”
WesTower was forced to hire consultants to improve back office operations, incurring about $1.3-million in fees in the first quarter that also put pressure on margins. “Their profitability could be further enhanced by getting some of the one-time costs related to consultants eliminated,” he said.
Exchange Income has strong management led by its chief executive officer Mike Pyle, but its diversification strategy is key because all the businesses may not be firing on all cylinders at the same time, he said. There are also natural hedges from getting revenue in both Canadian and U.S. dollars. He expects the stock could reach the $30-to $31-range over the next 12 months even though some analysts have higher targets.
The risks come from the fact that some of the aviation business is based on contracts, while other Alberta-based manufacturing businesses, like Jasper Tank, could be challenged if the province’s economy slows because of the lack of pipeline capacity or other problems in moving its oil and gas beyond its borders, he said.