Counsel Corporation

CXS - Q2 14 Review First Securitization Transaction Margin Expansion despite Weaker Volumes - 15 August 2014

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ANALYST: FRED WESTRA SECTOR: NON-BANK FINANCIALS Frederik.Westra@iagto.ca (514) 499-7371 ANALYST: PATRICK KUCZYNSKI RESEARCH UPDATE Company Profile CXS, founded in 1979, is a financial services holding company that currently operates one core business: Street Capital, the third largest residential mortgage lender in the broker channel. Secondary activities include distressed and surplus capital asset solutions, private equity investing, and real estate investing, development and management. COUNSEL CORPORATION (CXS-T) August 15, 2014 Q2 Review: First Securitization Transaction; Margin Expansion despite Weaker Volumes EVENT CXS reported Q2/14 financial results after market close yesterday. HIGHLIGHTS Revenues: were $36.1m, which was lighter than our $38.5m forecast, given weaker mortgages sold of $1.9b vs. our $2.1b estimate ($2.5b last year). MUA however came-in at $19.3b, ahead of our forecast of $19.1b, up 28.7% from $15.0b in Q2/13. Adj. EBITDA: was $6.5m, also less than our forecast of $7.8m due to the revenue miss and higher SG&A, and down from $8.1m last year. Net gains on mortgages sold widened to 81bps (ahead of our 77bps forecast) from 68bps last year. Margin: Counsel experienced adj. EBITDA margin expansion to 18.1% (20.4% estimate) vs. 16.2% in Q2/13 despite declining volumes due to more stringent underwriting, a more profitable asset mix, and potentially some renewals. Adj. Earnings: attributable to shareholders reached $6.0m, relatively flat from $5.9m in Q2/13. This was higher than our $5.0m forecast as the EBITDA underperformance was offset by $6.4m in FMV accretion mostly from the private equity portfolio vs. $2.9m last year. Adj. EPS: attributable to shareholders was better than expected at $0.06 vs. our $0.05 forecast, flat from last year. Securitization Milestone: Street Capital recorded its first securitization transaction of $11.0m, generating $18k of net interest income. We believe this channel will remain small in 2014, but should pick up steam after being granted a bank license (expected to be granted in roughly a year). BOTTOM LINE Our EPS estimates remain unchanged despite the Q2 beat to account for more modest sale of mortgages and higher SG&A in H2/14. However, we believe that Counsel can continue to experience meaningful margin expansion even on declining volumes due at least to the exponential increase in the renewal stream (expected at ~$800m in 2014 and ~$1.6b in 2015). This, combined with funding flexibility with the securitization conduit and other benefits derived from a bank license, makes Counsel an attractive story. VALUATION We are maintaining our TOP PICK recommendation and our target price of $3.80. Our target price is based on an equal weighting of our DCF ($4.85) and 12× a blended 2014-15 adj. EPS of $0.22 ($2.66) from continuing operations attributable to shareholders. Rating: 12-Month T arget: Current Price: $1.97 Target Return (incl. div .): 92.9% Regular Div idend / Yield: $0.00 / 0.0% Shares Outstanding (M) (Fully Diluted): 101.9 Market Capitalization (M): $201 Enterprise Value (M): $200 52-Week Range: $1.60 - $2.75 Fiscal Year End: December 31 Av erage Weekly Volume ('000): 1,091 Currency (unless otherw ise specified): CAD Financial S ummary 2012A 2013A 2014E 2015E Revenue ($M) 112.1 139.0 135.0 150.8 Adj. EBITDA ($M) 21.4 22.4 22.9 38.0 Adj. EBITDA Margin 19.1% 16.1% 17.0% 25.2% Adj. Net Income 13.8 16.2 18.5 25.3 Adj. Net Margin 12.3% 11.6% 13.7% 16.8% Adj. EPS (f.d.) $0.14 $0.17 $0.19 $0.26 MUA ($B) 12.0 17.5 20.8 23.8 EV/EBITDA 9.3x 8.9x 8.7x 5.3x P/E (f.d.) 13.8x 11.3x 10.6x 7.7x . Source: Company reports and Industrial Alliance Securities TOP PICK $3.80 $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 - 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 Volume CXS

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