Information Services Corporation — Cash flow fuelling ambitious growth plan

ISC continued its strong start to FY24, with H1 group revenue of C$124.2 (up 21% y-o-y) compared to C$102.4m in H123 and adjusted EBITDA of C$46.6m (up 44% y-o-y) compared to C$32.3m in H123. These increases in revenue and adjusted EBITDA were primarily driven by the strength in performance of ISC’s Saskatchewan Registry Operations segment (up 27.5% y-o-y in H124), combined with the full effect of the fee adjustments made in 2023 and record high-value property registrations via its Land Registry (up 45.8% y-o-y in H124). This strong H124 performance was driven by accelerated growth in Q224, which saw ISC achieve record group revenue and adjusted EBITDA, up 27% and 53% y-o-y respectively.

Normalised EBIT for H124 stood at C$26.8m, a 17.1% y-o-y increase on H123 (C$22.9m), implying a margin of 21.6%. However, the EBIT margin was marginally down from that recorded in H123, due to increases in salaries and cost of goods sold in its Services segment. Net income of C$10.7m and basic EPS of C$0.59 were lower than H123 (C$15.1m and C$0.85, respectively). This was due to the offset by increased share-based compensation expenses as a result of the rise in ISC’s share price, compared to a decrease in the previous year, alongside increased interest expense and amortisation associated with the MSA extension. However, it is worth noting that the significant increase in year-end net debt from FY22 to FY23 is attributable to the C$150m upfront payment for the MSA extension.

Management reiterated its guidance for FY24 revenue of C$240–250m (Edison’s estimate is C$242m) and adjusted EBITDA of C$83–91m (Edison: C$86m). We remain confident that ISC will achieve its targets for FY24, given the fact that its revenue and adjusted EBITDA in H124 made up 51% and 55% (see Exhibit 1) of our FY24 forecasts.

The key segment highlights of H124 were:

ISC continued to improve its strong operating cash flow in the first half of 2024, increasing it from C$20.0m in H123 to C$34.6m in H124. The increase in revenues from its Registry Operations and Services businesses were the primary source of this c 73% uplift in the period. ISC has historically exercised an excellent capital allocation policy and, moving forward, the primary uses for the additional cash will to be fund operational expenses, capital and other growth-related expenditure, reducing long-term debt (primarily the C$150m upfront payment of the MSA extension) and paying dividends to shareholders.

Management has stated that it expects ISC to be able to meet its cash requirements, including settling current liabilities of C$68m as well as any unexpected cash requirements as a result of changes in working capital requirements.

ISC maintains a strong balance sheet. During H124, it made voluntary prepayments of its credit facility (the aggregate amount of which was increased from C$150m to C$250m) totalling C$14m, with C$10m paid in Q224. The company’s net debt now stands at C$142m (down from C$153m at end FY23), with an implied leverage ratio of 2.0x across H123 and H124, which aligns with its long-term net leverage target of 2.0–2.5x. ISC also has access to a further C$100m accordion option, providing the flexibility to increase its existing revolving credit facility to C$350m to aid its growth over the coming years.

ISC has doubled in size on a revenue and adjusted EBITDA basis over the past 10 years. It is now looking to execute on a more ambitious phase of growth, doubling again on the same metrics (FY23 results) by FY28. The company aims to achieve this through a combination of continued organic growth in its Services segment, as well as international expansion and future growth in its Technology Solutions business. M&A activity will also play a role in ISC’s growth strategy, where returns exceed the cost of capital and align with the company’s long-term return on invested capital target (management does not state this target). Growth will be supported by its stable Registry Operations business. ISC will look to leverage its investments and achievements of FY23 strategically, while intensifying its focus on organic growth and global expansion.

ISC’s registry business is underpinned by long-term contracts and provides predictable, diversified and long-term sources of cash flow, providing a solid foundation for its growth strategy through to FY28. Registry revenue grew 7.2% and 12.9% y-o-y in FY22 and FY23, respectively, and ISC remains on track to record further growth in FY24 (27% y-o-y growth in H124). This growth is largely attributable to signing the MSA extension with the Province of Saskatchewan in July 2023, which granted ISC the power to introduce and/or enhance fees on certain transactions immediately. The extension of the agreement also ensures that ISC will provide registry and information services for the Province of Saskatchewan until 2053. Management has stated that the MSA extension will enable ISC to generate more than C$1.3bn in cash flow over the next 30 years (until 2053) through its Saskatchewan registries. This C$1.3bn in predictable cash flow will act not only as a strong foundation for ISC to build on, but also as a catalyst, enabling the continued acceleration of its long-term growth strategy, through both its Services and Technology Solutions business segments. This should therefore bolster investor confidence, given the success and stable nature of ISC’s registry business.

ISC’s Services segment leverages the company’s core competencies in understanding registries, as well as the ability to extract and package critical data effectively. The key services include due diligence, asset recovery, incorporation services, collateral management, account receivable management and corporate supplies. ISC’s Services segment has shown strong growth since 2015, having increased its revenue from C$12m to more than C$100m in FY23. It has continued to demonstrate the ability for further growth by recording c C$58m in H124, remaining on track to improve on its FY23 results. One of the key advantages of the services business is that it allows ISC to complement its existing segments, providing user fee revenue streams. Other differentials include its ability to enable greater organic growth because it allows ISC to capitalise on the growing market trend of outsourcing business processes, as well as meeting industry needs, allowing access to streamlined and secure highly regulated information. The most common companies associated with ISC’s services segment include financial institutions and law firms.

Its Technology Solutions segment, through its wholly owned subsidiary Enterprise Registry Solutions (ERS), has the potential for significant future growth and international expansion. The key advantage and enabler of this growth globally is ERS’s RegSys offering, which is a readily transferable technology platform capable of serving a wide range of registry needs. According to management, RegSys is a multi-register technology platform that delivers the flexibility and scalability, among other key features, to enable public sector organisations to deliver an enhanced service offering to businesses and citizens.

One key advantage of ISC’s Technology Solutions segment is its ability to be utilised across a diverse range of sectors, establishing significant scaling opportunities for ISC globally. Due to the nature of its technology offering, ISC has the ability to adapt quickly and move into new markets and different registry vehicles. The segment also creates recurring revenues (4.6% of group revenue in H124) that consist of software licences, monthly hosting, support and maintenance and warranty services.

ISC’s Technology Solutions segment customers include the Irish Aviation Authority, the Nova Scotia Registry of Joint Stock Companies, the State of Guernsey and the Republic of Cyprus, which demonstrate the segment’s ability to adapt to a wide range of sectors across different geographical locations.

Our FY26 group revenue forecast implies a 5% growth rate on FY25 and it is likely that ISC will need to engage in further M&A activity to reach its 2028 growth targets.

ISC has a strong history of M&A activity, having invested more than C$200m in eight transactions since 2015. However, M&A activity in the context of its FY28 targets is less predictable. This is because ISC will bear the risk of any acquired company, as well as the unknown timetable of developments post-acquisition, for example entering into an unfamiliar market or region compared to those in which ISC currently operates.

ISC has a basic acquisition strategy, the aim of which is to accelerate the increase in scope and scale of its business, to expand its technology and services portfolio and capabilities and to augment revenues, specifically recurring revenue. Its preference is for larger opportunities (greater than C$50m) that are material to ISC or smaller opportunities (less than C$50m) that meet the following criteria:

So far in 2024, the Bank of Canada has cut interest rates twice and forecasts suggest that further cuts are likely as inflation nears the Bank of Canada’s long-term target. The strong activity in the Saskatchewan real estate market is expected to continue in the near term, despite inventory challenges in lower-value homes. Continued population growth in Saskatchewan and improvements in market confidence have helped create increased activity in the real estate market, most notably affecting ISC’s Saskatchewan Land Registry (volume of transactions up 10% y-o-y in H124 and up 17% y-o-y in Q224). ISC is also protected to a certain extent from a possible a downturn in real estate activity due to the increased ad valorem fee, which has been in effect since July 2023, as well as its regular annual consumer price index (CPI) fee adjustments, which will both continue to support strong revenue uplifts in its Registry Operations segment.

Management forecasts that ISC’s Services segment will continue to see an increase in transactions and the number of customers. This is because enhanced due diligence and regulatory oversight are expected to continue, positively affecting ISC’s Regulatory Solutions division. Additionally, a decline in used car values, which not only worsens the loan-to-value of the vehicle but also reduces any equity debtors may have in their existing vehicles, combined with current rental, mortgage and inflationary pressures, is expected to negatively affect consumers’ disposal income. Management expects this to lead to increased assignment levels in its Recovery Solutions division over the next two years.

Management expects wages, salaries and cost of goods sold in its Regulatory Solutions division, part of its Services segment, and increases in technology costs in its Technology Solutions segment to be key drivers of expenses in ISC’s adjusted EBITDA through 2024. As a result of the MSA extension, ISC will have additional operating costs associated with the enhancement of the Saskatchewan registries and increased interest expense from additional borrowings, which are excluded from management’s adjusted EBITDA calculations.

Capital expenditure is expected to increase due to the enhancement of ISC’s Saskatchewan registries, although it will remain negligible. Management will continue to look to reduce long-term debt in line with its net leverage target of 2.0–2.5x. Management has further reiterated its FY24 revenue guidance of C$240–250m (Edison: C$242m) and adjusted EBITDA guidance of C$83–91m (Edison: C$86m).

ISC’s operations often span multiple business segments. On 2 July, ISC announced the launch of the Bank Act Security Registry online, a self-service customer portal for the Bank of Canada, over a five-year contract. ISC will act as the operator and technology provider for the registry, offering 24-hour service provisions 365 days a year, as well as a range of online submissions and search capabilities for customers. The contract is a further demonstration of ISC’s growth capabilities across its Technology Solutions and Registry Operations business segments.

In July 2023, ISC made the first of five annual cash payments of C$30m following the MSA extension the previous year, using funds drawn from its credit facility. On 7 August 2024, the board declared a quarterly cash dividend of C$0.23 per Class A share, payable on or before 15 October 2024, to shareholders on record on 30 September 2024.

Our forecasts are unchanged (see our April update note for more detail). We remain confident that ISC will achieve its revenue and profit full year guidance for FY24, considering both revenue and adjusted EBITDA at H124 stand over 50% of our FY24 forecasts and management’s full-year guidance. Our forecasts for FY24 incorporate 13% y-o-y organic growth in ISC’s Services segment to C$114.9m and 12% growth in Registry Operations to C$115.9m, due to a full year of incremental earnings from CPI fee uplifts and the increased ad valorem fee.

With ISC’s visible track record of deleveraging, we expect net debt to decrease by 8.7% to C$139.8m in FY24, implying leverage of 1.7x, underpinned by top-line growth and increased profitability. We expect organic growth in ISC’s Services segment to be the main driver of revenue, PBT and EPS growth across FY24e, FY25e and FY26e.

We have maintained the current annual dividend of C$0.92 for the next three forecast years. However, the dividend implies cover of 2.1x and 2.3x on our FY25 and FY26 forecasts, respectively, and considering ISC maintained an average cover of 1.8x across FY20–23, there is comfortable room for management to grow this dividend if it chooses.

We value ISC using a discounted cash flow (DCF) model and our valuation of C$40.4/share remains unchanged from our previous note, indicating 48% upside to the current share price of C$27.3/share. The model incorporates the following assumptions:

The current share price of C$27.3 implies a WACC of over 10%, which in our view looks unreasonably high considering the company’s significant growth potential, backed by strong, secured, predictable cash flows to use as a foundation for growth over the next 30 years from the MSA extension. Even at a conservative 0% growth rate, post our FY26 estimates, the implied stock value is still C$35.6/share, which signifies a 30% upside to the current share price.

The sensitivity of our assumptions is shown in the table below, indicating differing terminal growth rates and WACCs. For example, raising our terminal growth from 0% to 2% gives a value of C$49.5/share, representing 81% upside to the current share price.

We note that our current P/E for FY25e of 13.0x represents a 16% discount to ISC’s five-year average, despite it having strong, secured cash flows up to 2053 and large growth potential in the Services and Technology Solutions segments.

If we apply the 15.1x average forward P/E multiple to out FY25e EPS of C$2.10, we arrive at a value of C$29.3/share, still implying 7% upside to the current share price.

ISC’s consensus EPS estimates for both FY24 and FY25 were cut substantially during Q224. This explains why its current consensus P/E trades higher than its five-year estimate at c 18x. However, since ISC’s strong H124 results, consensus has come back closer to our P/Es of 14.4x FY24e and 13.0x FY25e, although this is not yet reflected in Exhibit 8 above.

On our estimates, ISC trades at discounts of 21% and 35% relative to peers on an FY25e P/E and EV/EBITDA basis, respectively, with a dividend yield of 3.4%, which is at the upper end of its peer group (average 1.8%).