Information Services Corporation — Registering growth

ISC, through its expertise in developing and managing secure government registries, capitalises on the burgeoning demand from citizens and businesses for personalised, real-time, secure data services from governments with the need for improved convenience. Governments and financial institutions are seeking cost-saving opportunities that enable them to focus on their core business without comprising service quality. Consequently, they are reassessing their public service delivery models and pursuing innovative forms of public-private partnerships. With ISC’s expertise, technology and proven experience in managing data authentication and security, it is well positioned to expand in the global registry market and continue onboarding new customers.

ISC has a history of continued, sustainable year-on-year top-line and EBITDA growth, driven both organically and through an accretive M&A strategy. We expect revenue to grow by 10.7% y-o-y in 2023 and 9.6% y-o-y in 2024, largely attributable to the Saskatchewan registries extension alongside a full-year contribution from last year’s acquisitions; our adjusted EBITDA forecasts imply year-on-year growth of 16.4% to C$75.0m in 2023 and 19.8% to C$89.8m in 2024. We anticipate a significantly higher net debt level in 2023 of C$148.6m (pre IFRS 16), implying a leverage ratio of 2.0x, due to the C$150m upfront payment for the MSA extension, albeit we expect this will decline year-on-year with the accompanied strong cash generation. Although our forecasted 2023 basic EPS remains broadly flat at C$1.9, attributable to a substantial increase in net finance costs alongside a surge in amortisation from the extension, we expect incremental growth from the MSA extension to come through in 2024, with an EPS forecast of C$2.1.

In our view, our two-stage tapered discounted cash flow (DCF) valuation of C$37.2/share implies that the current share price does not reflect the company’s long-term, sustainable cash flows secured by the MSA extension (up to 2053), in addition to the substantial growth prospects of the Services division. This is further evidenced by the fact that our undemanding P/E for 2024e of 9.3x represents a discount of 40% to the company’s five-year average of 15.6x. If we apply this average forward P/E multiple to our FY24e diluted basic EPS, we arrive at a value of C$33/share, implying 68% upside from the current share price of C$19.8. Arguably, this method gives little credit for future acquisitions, which are part of the company’s strategy and may be forthcoming. ISC trades at a discount to the medians of both the forward P/E and EV/EBITDA multiples of its peers and its dividend yield of 4.7% is at the upper end of the range.

Although historically not a highly leveraged business, following the MSA extension the company will need to make a total payment of C$300m up to FY28, increasing its exposure to interest rate risks on its debt, which could be exacerbated if additional acquisitions are made. Interest rate hikes have dampened the Saskatchewan real estate market, affecting the volume of Land Registry transactions (particularly in Q223), which could have a further impact on the business if they continue. With its progressive M&A strategy, there remains the risk that an acquired company, or its development once acquired, may not perform to management’s expectations. The company faces marginal exposure to fluctuations in various other currencies, with the euro being the most material, albeit c 97% of the company’s operations are denominated in the Canadian dollar.

ISC is responsible for the collection, maintenance and provision of three of the four largest Saskatchewan registries, which consist of authenticated government data relating to individuals and businesses including property and land ownership, personal property and vehicle registrations. In addition, ISC offers complementary information services and solutions including additional registry services, information services portals and customised services. By managing the entire information management and service delivery process, the company is capable of providing a ‘one-stop shop’ for governments and private-sector organisations, allowing them to fully outsource these functions.

The end users of the products and services include individuals and businesses such as real estate agents, home builders, financial institutions, insurance companies and land developers, as well as established intermediary customers such as legal, survey and engineering firms. ISC generates revenues primarily through fees from end-use customers for registry searches and land, property or corporate registrations as well as maintenance transactions. The fee terms range, depending on the type of registry transaction, from flat fees to value-based fees (eg dependent on the value of land) in addition to negotiated/customised fees. The company’s Registry Operation growth is largely influenced by favourable Saskatchewan GDP growth, which is driven by a diversified range of agricultural, mining and oil and gas exports (34% of provincial real GDP in 2022), alongside increases in the volume and value of provincial real estate transactions. The organic development is supported by strategic M&A.

ISC was established in 2000, as the Saskatchewan Land Information Services Corporation, in order to replace the Saskatchewan Land Titles Office as a Crown corporation (a public sector organisation established and funded by the local government). It took over the responsibilities of administering the Land Registry system, Land Survey, Personal Property Registry (PPR) and Geomatics services from various provincial government departments. On 1 November 2000, its name was changed to Information Services Corporation of Saskatchewan. Prior to ISC's creation, the province had initiated a five-year ‘LAND project’ to develop an advanced processing system for electronic land title and land survey registrations and searches in Saskatchewan. By 2005, ISC had launched an online submission process within the Land Registry for its customers.

From 2002 to 2004, ISC developed a new online PPR system and later took on additional registry management responsibilities, including the Vital Statistics Registry in 2008 and the Corporate Registry in 2010. ISC has since diversified its service offerings to include ancillary information services to meet consumer and business needs. In 2013, ISC was privatised through an IPO on the Toronto Stock Exchange. In that same year, the company secured a 20-year MSA with the Saskatchewan government. Crown Investments Corp (CIC) still owns 31% of the shares, on behalf of the Province of Saskatchewan, and holds a golden share.

ISC operates through two main corporate divisions, plus the smaller Technology Solutions division, defined by their primary type of service offerings:

The nature of the company’s fee structures for the three divisions are shown below.

ISC’s strategic approach centres on enhancing shareholder value through the consistent performance of its current operations, bolstered by the effective execution of suitable growth prospects. The company has a long-running history of consistent year-on-year revenue and EBITDA growth, underlining its commitment to generating incremental, sustainable cash flows over the long term as a fundamental part of its corporate strategy. To achieve this, the company has strategically combined mergers and acquisitions with organic, underlying growth; notably, since 2017 the company has successfully completed seven acquisitions, expanding its customer base and enhancing revenue substantially. Since inception, ISC has evolved from being purely a registry business, into a multifaceted organisation, comprising three distinct business lines with the addition of Technology Solutions and Services. This expansion showcases ISC’s agility and adaptability in meeting the evolving needs of its clientele and the market, in addition to diversifying its revenue base.

By leveraging its existing lines of business, ISC intends to provide leading registry services and solutions to customers on a global scale, with the potential for expanding into adjacent opportunities through innovation and/or acquisitions with a focus on revenue growth and corresponding EBITDA growth.

ISC plans to continue to build on its robust foundation, growing both organically and through strategic acquisitions. This can be achieved in the following three areas:

The company continues to seek acquisitions that will have a direct impact on its bottom line and that are expected to be accretive on an EPS and free cash flow basis. Most recently, in 2022, ISC completed three acquisitions for a total consideration of C$55.1m, generating a total combined pro forma FY22 revenue of C$22.6m (to put it in perspective, prior to 2022 the company had made four acquisitions since 2017). These acquisitions highlight ISC’s strong industry credentials and firmly align with its commitment to pursue strategic growth and capitalise on opportunities that add long-term, diversified value (geographically and in terms of revenue stream) to the business. Progressive M&A is strongly bolstered by the 20-year extension of the MSA with the Province of Saskatchewan (detailed later in our report), which provides the company with the exclusive rights to manage and operate the registries on behalf of the province until 2053. Fee adjustments from the extension cement long-term future cash flows and represent a clear catalyst to expedite ISC’s long term growth strategy.

Management typically seeks acquisition targets with EBITDA multiples in the 7–9x range, in addition to a criteria of strong cash flow generation. ISC’s strong, cash-generative business model bolsters its runway for growth through M&A activity.

ISC’s board consists of 10 members who are responsible for the stewardship and oversight of the company with authority over all areas of corporate responsibility. Consistent with the majority of Canadian corporations, all board members are independent directors. The Saskatchewan government has the right to appoint a number of members to the board that equates to the selling shareholder’s pro rata share of the issued and outstanding voting securities, which currently stands at three (the minimum board appointment right is two).

The management team consists of nine members, with a wealth of expertise, including:

The rest of the management team includes Susan Bowman (head of ERS, ISC’s Dublin based subsidiary), Ken Budzak (executive VP, registry operations), Loren Cisyk (executive VP, technology solutions), Laurel Garven (VP, corporate development and business strategy), Kathy E Hillman-Weir (executive VP, CCO, General Counsel and Corporate secretary), Catherine McLean (VP, people and culture) and Clare Colledge (president, ESC corporate services).

ISC has a total share capital of 18.0m (26 October 2023) shares with a free float of 70%. Its largest shareholder, Crown Investments Corp (CIC), owns 30.2% of the shares, on behalf of the Province of Saskatchewan. Other principal shareholders include CI Global Asset Management (13.6%) and QV Investors (12.7%).

Canadian governments play a pivotal role in gathering, maintaining and providing verified information concerning individuals, businesses and property. The encompassing data covers crucial aspects such as land ownership, business registration, personal property, and birth and death records, often meticulously stored in registries, comprising distinct files that contain the relevant data. These files are stored in paper, electronic or hybrid formats, accessible to the public to search. These comprehensive registries serve vital purposes, such as documenting changes in land ownership and recording liens on personal property, and by doing so they actively foster economic growth and secure ownership titles, minimising ownership disputes.

As governments struggle to provide more extensive and comprehensive services to citizens and businesses on limited budgets, registry services are increasingly outsourced to third parties that can meet the customer demands.

ISC manages and administers the following four integrated end-to-end registries on behalf of the Province of Saskatchewan:

In addition, ISC has an exclusive agreement with the Province of Ontario (OPTA agreement) by which Ontario Property Tax Assessment Services provide property tax assessment services to over 440 municipalities in Ontario, facilitating the management of property tax rates and distribution.

The Registry Operations segment involves the provision of registry and information services and software solutions to governments and private sector organisations. It collaborates with its clients to uphold their policies and preserve data integrity, while managing the information technology and authentication procedures. Currently, through this segment, ISC provides registry and information services on behalf of the Province of Saskatchewan under a recently extended 20-year MSA, up to 2053. Fee adjustments from the extension are expected to add to revenue and EBITDA. This material extension prolongs a longstanding and successful PPP, reaffirming ISC’s position as one of Canada’s leading registry operators and provides ISC with strong, stable, long-term cash flows.

This segment can be split into five subdivisions: Land Registry (mainstay of the division, 65% of FY22 revenue), PPR (12%), Corporate Registry (12%), Ontario Property Tax Assessment Services (through the Reamined acquisition, 10%) and other registry operations (1%). Land Registry incorporates revenues derived from fees earned from Saskatchewan Land Title Registry, Land Surveys Directory and Geomatics service transactions. Most of the revenue generated from the Land Registry is from the Land Titles Registry transactions, which operates through a value-based (ad valorem) fee system, often dependent on the value of Saskatchewan property being transferred, the number of new builds and property buying activity; provincial GDP growth rates play a pivotal role in driving this. A high value property registration typically generates revenue of at least C$10,000, usually derived from both commercial and larger agricultural transactions, with title searches forming the largest component of transaction volume.

Saskatchewan PPR revenue is derived from flat fee transactions, primarily from search volumes. Corporate Registry transactions also hold a flat fee structure, albeit unlike other registries, for this registry ISC earns the majority of its fees in relation to maintenance services provided to entities that file annual returns or wish to make changes to their business profile structure.

Overall, the Saskatchewan registries are a valuable asset with predictable and recurring revenues supported by stable demand correlated with population/GDP growth, and CPI-linked price escalators.

In June 2022, ISC expanded its Registry Operations division for the first time through the acquisition of Reamined Systems, a recognised leader in providing property tax management infrastructure and services in the province of Ontario; this has driven the inception of a new subdivision in the segment, Ontario Property Tax Assessment Services (OPTA). Reamined is complementary to the Saskatchewan registries business and has provided its services to Ontario for over 25 years, routinely engaging in negotiations to renew up to five-year agreements with the province. These services support critical applications of information used by over 440 municipalities to facilitate the determination of property taxes annually. The acquisition is expected to be both earnings and free cash flow accretive and was responsible for the totality of year-on-year revenue growth in the division seen in 2022; it contributed to C$8.9m of additional revenue in 2022 (pro forma FY22 revenue of C$15.3m). We anticipate that it will support ISC as a strong free cash flow contributor in the long term.

ISC has successfully extended the MSA term with the Province of Saskatchewan for an additional 20 years, securing the company exclusive right to operate the Saskatchewan registries up to 2053, a clear endorsement from the Canadian registries industry. Furthermore, ISC has been granted the right to introduce and/or enhance fees, effective as of July 2023; this includes, but is not limited to, an increased fee for Land Registry Title and Abstract Detail from C$12 to C$15, in addition to a rise from 0.3% to 0.4% in the fee for change of ownership of the value of the title or abstract as a percentage of its value. The breakdown of fee adjustments is available on the company website.

The fee enhancements are expected to result in incremental annual revenue and adjusted EBITDA of c C$17m and C$16m, respectively (expected addition of C$7m and C$6m to revenue and adjusted EBITDA in H223). This solidifies ISC’s position as one of Canada’s leading registry operators and the significant incremental cash flows generated from the extension should expedite the company’s long-term growth strategy. The consideration to be paid by ISC to the province consists of:

We expect this extension to be immediately accretive to free cash flow and earnings, attributable to the fee enhancements, with management anticipating a 10% addition to the unlevered internal rate of return, creating significant value for ISC’s shareholders. The substantial opportunities unleashed by this extension have unsurprisingly caused a turn in investor sentiment, with a share price increase of c 22% (from C$21.8 to C$26.5) in the three weeks following the announcement. To finance the gross payment of C$300m up to FY28, ISC has successfully increased its rolling credit facility (RCF) terms to an aggregate available amount of C$250m, comprised of the existing C$150m RCF and an additional C$150m facility, with the flexibility to upsize through a C$100m accordion option. The debt covenant has been successfully increased from a net debt/EBITDA of less than 4x, providing the company with further balance sheet flexibility for potential deals.

The sustainable cash flows from the Registry Operations Division, underpin the aggressive organic growth associated with the Services division. This division has seen revenue growth of c 600% from 2016 to 2022 to C$92.3m, following its inception in 2015 through the acquisition of ESC Corporate Services. FY22 marked a major milestone for the division, with revenues surpassing that of Registry Operations for the first time. We expect this growth to continue in the foreseeable future, as the company capitalises on the growing trend towards business process outsourcing.

We expect the Services division to deliver new customer and transaction growth in the long run as the company continues to implement technology that provides additional value-added product offerings. The launch of Recovery Complete in the latter half of 2022 should maximise revenue potential from the company’s existing customer base. This integrated technology platform offers easy access to ISC’s entire range of products and solutions for all search and registration customers, complementing the company’s enhanced Registry Complete platform, which has been successful in streamlining and enhancing product offerings. ISC has also expanded its offerings in the Services segment with the addition of accounts receivable management (through the UPLevel acquisition), which complements asset recovery within the Recovery Solutions suite of services, supporting customers the entire way through the lending life cycle.

ISC’s Services segment offerings can be categorised into three subdivisions, namely Corporate Solutions, Regulatory Solutions and Recovery Solutions, summarised in Exhibit 11.

Revenue in the segment is earned through transaction fees for search and registration services with additional revenue earned in Recovery Solutions through management fees and commission from the sale of the assets. Corporate suppliers are charged a per-unit fee in the same manner as a retail transaction product.

The Services division, provided through wholly owned subsidiary ESC, has demonstrated substantial and consistent topline and EBITDA growth, albeit at lower margins compared to Registry Operations. FY22 marked a major milestone for the Services division, with revenues exceeding Registry Operations for the first time since inception of the division (following the ESC acquisition in October 2015). This is partially attributable to new customer acquisition and heavy investment in technology platforms, supplemented by the acquisition of UPLevel in February 2022.

FY22 revenue growth for the Services division was 22.8% y-o-y reaching a record C$92.3m (15.1% like-for-like, 7.7% organic). We expect this incremental growth to continue as the company expands on new opportunities with its customers and continues its investment in the Registry Complete and Recovery Complete technology platforms, improving its revenue potential for the existing customer base. Continued transaction and customer growth should further bolster this division’s expansion.

In 2022, ISC acquired UPLevel, a company that provides contact and accounts receivable management, debt collection and Personal Property Security Act (PPSA) search and registration services, with operations in Ontario and Quebec. This presents an additional revenue stream and augments ISC’s credit life-cycle product range; the accounts receivable management service offering supplements the company’s asset recovery services, providing customers with a full end-to-end recovery solution. It contributed to 7.7% divisional growth in FY22 (incremental revenue of C$5.8m, C$7.3m pro forma for the year). Not only does it provide a new source of revenue but it also enhances the offerings to current and future clients.

Since inception in 2018, Technology Solutions has represented a smaller, embryonic-stage supporting division. Revenue for the division is generated through:

Through ISC’s wholly owned subsidiary Enterprise Registry Solutions (ERS), acquired in 2017 and headquartered in Dublin, the company offers RegSys, a complete registry solution that provides a readily transferable technology platform enabling public sector organisations to deliver enhanced services to businesses and citizens. The system has been used to manage other legal registers such as charities and pension schemes.

The division took a double hit, initially from the pandemic, with the local government responding to the health crisis, then the current macroeconomic headwinds, which have caused the deferral of numerous projects; revenue from both third parties and internal related parties has consistently declined year-on-year for the past three fiscal years and for the first time Technology Solutions reported a negative EBITDA figure in FY22 (a loss of C$1.38m).

However, activity in this division is burgeoning with the unplugging of procurement activities and thus management is optimistic on the improvement of the division’s business development outlook; Q123 saw the pipeline opening up with two new contract wins, including a project deploying the RegSys platform to the Department of Registrar of Companies and Intellectual Property in Cyprus. Both contracts align to historical Technology Solutions design and implementation projects, ranging in value from C$5–15m, with revenue recognised through achievement of milestones or by the percentage of completion consistent with the revenue recognition method adopted for projects.

We expect the division to gain more momentum and return to growth as solution implementation projects that were deferred from 2022 are delivered and completed, in addition to a recovery in procurement activities from jurisdictions. However, we expect growth to be at a lower single-digit level compared to the two larger divisions.

The Province of Saskatchewan boasts a diversity of resources, empowering it to successfully navigate through various macroeconomic cycles; remarkably, over the last decade, the province has seen record population, employment, investment and export growth. According to Statista, the number of housing starts in Saskatchewan has risen year-on-year from 2019 to 2022, with an overall increase of 74% to 4,211 in this period. The province had real GDP growth of 5.7% (to C$81.8bn) in 2022, exceeding the growth of any other province. A range of sources estimate that GDP growth for 2023 will be 2.2%, exceeding the estimated overall Canadian GDP growth of 0.7%. Furthermore, at the end of Q123, Saskatchewan had the second lowest provincial net debt to GDP of 14.1% (Canada as a whole had a record 27%).

The burgeoning Saskatchewan economy is further highlighted by the province experiencing the second lowest unemployment rate in 2022 out of the 13 provinces and territories. The strength of the region’s economy bolsters long-term registry cash flows for ISC and should augment the company’s growth potential.

Aggressive hikes in mortgage interest rates from the Bank of Canada dampened housing sales in 2022, with the number of units sold declining 25% y-o-y to just under 500,000. Saskatchewan housing sales were less heavily affected, with an 11.7% decrease in the number of units sold; this is partially attributable to the Saskatchewan housing market being more undervalued and retaining better affordability. At the end of 2022, the five-year fixed mortgage rates stood at 6.5% versus 4.8% at the end of 2021. The Bank of Canada further increased rates in August 2023 to 6.79%.

Real estate activity has declined substantially in Canada as prospective monthly mortgage payments have soared and buyer sentiment has declined. This affected ISC’s Saskatchewan Land Registry revenue in Q223, with high-value transaction revenue declining 33% compared to Q222. Nonetheless buyers could quickly regain confidence in the real estate markets when the Bank of Canada pauses its aggressive interest rate hikes, with management expecting a recovery in Land Registry transactions in 2024; bond markets are projecting the first central bank interest rate drop in Q224 or Q324, consequently reducing mortgage interest rates (historically, after the central bank has reached its terminal rate, it takes an average of six months before it starts to reduce them). Various sources predict that a normalisation of rates will occur at the c 4% level for mortgages.

With regards to the Services division, Corporate Solutions and Regulatory Solutions are relatively diversified with little seasonality; instead, they fluctuate in line with macroeconomic factors. Q223 was particularly robust for Regulatory Solutions partially attributable to many of ISC’s financial institution customers enhancing due diligence procedures as a result of the rising interest rate environment, recording a 7.5% increase in revenue. Management expects to see customer and transaction growth remain strong in this subdivision as high interest rate headwinds persist alongside new customer acquisitions.

ISC has a history of continued, sustainable year-on-year top-line and EBITDA growth, driven both organically and through an accretive, strategic M&A strategy. We anticipate revenue to grow by 10.7% and 9.6% y-o-y in 2023 and 2024, respectively, largely attributable to the Saskatchewan Registries extension alongside a full year contribution from acquisitions made in 2022. Furthermore, ISC is highly cash generative although it currently has a significantly higher net debt due to the C$150m upfront payment for the MSA extension, leading to a pro forma net debt/last 12 months EBITDA of c 4.0x in July. We expect the end 2023 net debt (pre IFRS 16) will decline to C$149m (net debt/EBITDA of 2.0x) and further to C$136m and C$121m in 2024e and 2025e, respectively. This will provide balance sheet capacity for further potential deals, with the company’s strong track record of deleveraging (long-term target of 2.0–2.5x). Subsequent to the MSA extension and the associated C$300m payment up to FY28, ISC’s debt covenant has been successfully increased from a previous net debt/EBITDA requirement of less than 4x, providing further balance sheet flexibility.

From 2019 to 2022, ISC displayed strong growth, with revenue and adjusted EBITDA increasing 43% and 61% to C$189.9m and C$64.4m, respectively, in this period. The Services division, in particular, stood out, increasing revenue by 80.6% in this period and in 2022 for the first time becoming the largest division in terms of revenue contribution, albeit at lower margins than the core Registry Operations. Registry Operations, the historical homestay of the group, saw top-line growth of 30.3% in this period, both organically and through acquisitions, with an average EBITDA margin of 42%.

Revenue increased 8% in H123 to C$102.4m compared to the same period in 2022 (H122: C$95m). A subdued property market and subsequent reduced Land Registry transactions (primarily in Q2) were largely responsible for the 21% decrease in net income to C$15.1m. Q223 highlighted the slowing Saskatchewan real estate market, which affected Land Registry transactions, and half-year earnings as a consequence, albeit this was partially offset by first-time income from the Reamined acquisition. Margins took a substantial hit, partially attributable to increased employee costs (wage and salary costs rose 25% to C$28.9m in H123). Despite this, management increased both FY23 revenue and adjusted EBITDA guidance, reaffirming the incremental value of the MSA contract extension.

The Registry Operations division saw reduced activity in the Saskatchewan real estate market following successive interest rate increases by the Bank of Canada, leading to a decline in Saskatchewan Land Registry revenue of 12%. This was largely offset by the full six months revenue contribution of C$7.7m from the new OPTA division (from the Reamined acquisition in June 2022). Overall, the Registry Operations division saw top-line growth of 7.9% to C$47.6m. However, adjusted EBITDA for this division dropped 1% in this period to C$24.9m, primarily attributable to the more subdued revenue contribution from Land Registry operations. Adjusted EBITDA margin for the period stood at an impressive 52% despite strong macroeconomic headwinds (H122: 57%).

The Services division in this period recorded revenue and adjusted EBITDA increases of 7% and 5% to C$50.8m and C$11.5m, respectively, implying a margin of 22.6%. This increase was largely attributable to a robust performance from the largest subdivision, Regulatory Solutions, which saw revenue increase by 11% to C$37.9m, as ISC’s financial institution customers implemented stronger due diligence as a result of the higher interest rate environment.

Despite top-line growth in the Technology Solutions division of 21.7% to C$4.0m, adjusted EBITDA turned negative, declining to a loss of C$0.6, primarily attributable to increased people expenses to service new internal and third-party projects. However, Q223 involved the early-stage delivery of two new contracts, revenue from which will be recognised in the quarters that they are earned; this is either through achievement of milestones or percentage of completion consistent with project-specific revenue recognition methods. We expect this incremental revenue to support the recovery of this division in the second half of the year. The overall opportunity for this segment remains positive as the market continues to return to normal and increases in procurement activity unravel.

We forecast 2023 revenue and adjusted EBITDA of C$210.1m and C$75.0m, representing year-on-year increases of 11% and 16%, respectively, largely attributable to the MSA contract extension and the associated fee uplift. These forecasts are within the upgraded company guidance range. We anticipate a substantial increase in amortisation in 2023 from the extension to C$17.6m (FY22: C$11.8m); the C$300m extension is amortised over 30 years on a straight-line basis, with around six months included this year. Despite this amortisation impact, we forecast 2023 normalised EBIT of C$54.6m, an increase of 9.9% y-o-y, yielding a margin of 26%. We forecast 2023 year-end net debt of C$148.6m, compared to C$31.6m in 2022, following the C$150m upfront payment for the extension. A subsequent increase in forecasted net finance costs from C$3.2m in 2022 to C$8.8m in 2023e (and with an assumed flat tax rate of 28.5%), means our 2023e net income (normalised) shows a minor year-on-year decrease of 0.6% to C$34.0m, equating to forecasted 2023 basic normalised EPS of C$1.9, broadly in line with that in 2022. We predict this will increase by 10.4% to C$2.1 in 2024, with a full-year contribution from Saskatchewan registry fee uplifts.

As a result of the extension, alongside a full-year revenue contribution from OPTA (acquired in June 2022, we expect a full year to add incremental revenue of c C$6.4m to 2023e), we forecast revenue growth of 15% in the Registry Operations division to C$105.4m. We also forecast revenue growth of 7% to C$98.8m in the Services division: 6% driven organically and 1% from a full-year contribution of the UPLevel acquisition made in February last year (pro forma full-year revenue of C$7.3m). In Technology Solutions, we envisage revenue growth of 1.5% to C$5.9m and positive EBITDA of C$1.3m (2022: -C$1.4m), driven by increased customer acquisition and revenue recognition of the two new contracts.

ISC has a visible track record of strong positive operating cash flows, which we expect to increase in 2023 and 2024 by 37% and 23%, respectively, largely due to improved EBITDA and more favourable working capital movements (positive compared to negative in 2022). We anticipate a larger cash outflow from investing activities in 2023e of C$151m (2022: C$56m), almost fully attributable to the C$150m upfront contract extension fee.

The company boasts a strong balance sheet, ending 2022 with net debt (pre IFRS 16) of C$31.6m (net debt/EBITDA of 0.5x). With a visible track record of deleveraging, we anticipate 2023 net debt of C$148.6m (following the C$150m upfront payment for the MSA extension in July), implying a leverage ratio of 2.0x, underpinned by top-line growth and increased profitability. The restated RCF terms, with a subsequent aggregate of C$250m available, and additional flexibility through the C$100m accordion option, provides ISC with further debt flexibility for potential deals. The company also demonstrates a positive sustained net asset position with expected continued growth. Net assets in 2022 stood at C$156m. We expect this to increase consistently year-on-year, reaching C$186m in 2024.

ISC has a practice of paying a sustainable dividend on a quarterly basis. Management’s objective is to achieve dividend growth over time while balancing its strategic business priorities. The amount and timing of any dividends payable by the company are based on cash available for distribution, financial requirements, any restrictions imposed by the credit facility, future financing requirements and other factors. Since listing, the company has increased its dividend materially once, in December 2021, with a quarterly dividend increase from C$0.20 to C$0.23 (C$0.8 to C$0.9 on an annual basis). We have maintained the current annual dividend of C$0.9 for the next three forecasted years; however, since this implies cover of 2.1x and 2.2x in 2024e and 2025e, respectively, and with 2019–22 average cover of 1.8x, a progressive dividend would not be surprising.

In this section we outline our DCF-based valuation and look at how the company’s multiples compare with its peers and relative to its own history. On this basis, we value the stock at C$37/share, which implies 88% upside from the current share price. We also note that the shares trade at a discount to the company’s own history of 40% and to peers of 23%, which supports our valuation.

Our DCF model gives a value of C$37.2/share, indicating substantial upside potential to the current share price of C$19.8/share, with the following key assumptions in the DCF model:

The current share price of C$19.78 implies a WACC of over 10%, which in our view looks unreasonably high considering the company’s sustainable growth prospects and secured long-term cash flows with the MSA extension.

The sensitivity of our assumptions is reflected in the table below, indicating differing terminal value (TV) growth rates and WACCs. For example, raising our TV growth from 0% to 2% gives a value of C$47.2/share, representing over 100% upside to the current share price of C$19.8.

The chart below details the progression of ISC’s consensus forward P/E over the last five years. The range at the extremes is a low of 11.0x, reached briefly post COVID-19 and again recently, and the high is 21.9x in June 2021 following a record first quarter (at the time) Q121, with net income increasing 64% y-o-y and positive momentum as the pandemic eased. Over this entire five-year period, the range has been 11–22x with an average of 15.6x.

Our current P/E for 2024e of 9.3x represents a discount of 40% to the five-year average, despite secured cash flows up to 2053 (announced in July 2023) and the large growth prospects within the Services division. We believe that this discount is not warranted and as macroeconomic conditions start to normalise with reductions in interest rates, investor sentiment may start to turn.

If we apply the 15.6x average forward P/E multiple to our FY24e diluted basic EPS of C$2.1, we arrive at a value of C$33/share, implying 68% upside to the current share price. Arguably, this method gives little credit for future acquisitions, which are part of the company’s strategy and may be forthcoming and earnings enhancing.

Recognising that there are no pure direct publicly listed comparators, below we show multiples and yields of a range of companies that are exposed to similar end-markets, some with business operations in the registries sector. From a multiples perspective, ISC trades at a discount to the medians of both the forward P/E and EV/EBITDA multiples except for those of two companies: Capita and Link Administration Holdings. Its dividend yield of 4.7% is at the upper end of its respective peer group values.

The majority of ISC’s peers are private, the most relevant being Teranet (wholly owned by the Ontario Municipal Employees Retirement System, OMERS), one of Canada’s leaders in the delivery and transformation of statutory registry services, with extensive expertise in land and commercial registries. Specifically, it operates the Electronic Registration System for Ontario, the Land Titles and Personal Property registries for Manitoba, and is the market leader in Canadian lien registration and search, asset recovery services and insolvency management.

Below we detail several sensitivities for ISC that investors should be aware of.