NEW YORK, Sept. 13, 2021 /PRNewswire/ -- Argus
Research, an independent investment research firm, has launched
Equity Report coverage on Solution Financial Inc. (TSX:SFI)
Click here to view Full Argus Equity
Report
Excerpts & Highlights from the Report as conveyed by Argus
Analyst Steve Silver, follow:
BUSINESS DESCRIPTION:
Solution Financial Inc. was founded in 2004 and is headquartered
in Richmond, British Columbia,
Canada. The company specializes in sourcing and leasing luxury and
exotic vehicles, yachts, and other high-cost assets that
traditionally hold their value over time. Its target customer base
consists of affluent immigrants, international students, and
business owners who have limited credit histories in Canada and, thus, difficulty securing
financing. This high-quality clientele has resulted in virtually no
bad-debt charges and need for vehicle repossession.
The company established its market presence in British Columbia, and has initiated efforts to
expand into Alberta and
Ontario over the past two years.
Importantly, Solution Financial has maintained profitability since
going public in mid-2018 , spanning 10 quarters through the second
quarter of fiscal 2021 (ended April 30,
2021). Of note, the profitability was achieved despite
significant headwinds caused by the COVID-19 pandemic.
In our view, Solution Financial is still at an early stage of
its growth cycle, and we believe that its successful buildout in
servicing the British Columbia
market should help establish a presence in new markets. We note
that Ontario represents a larger
opportunity than British Columbia
and Alberta combined, accounting
for nearly 50% of Canada's
international student population and roughly 45% of new immigrants
each year.
Solution Financial was able to maintain solid monthly leasing
volumes in fiscal 2020 (October 31),
despite a more-than-50% decline in the number of international
students enrolling and returning amid travel restrictions related
to COVID-19. Prior to the pandemic, the trend of increasing student
permit holders in Canada had been
highly favorable, increasing from 110,000 in 2000 to over 640,000
in 2019. Importantly, nearly 75% of this total is covered under the
company's current commercial footprint. As such, we expect the
lifting of restrictions and resumption of normalized conditions
over time to provide an additional tailwind to the company's growth
trajectory.
We view immigration as another favorable opportunity for
Solution. Immigration accounts for nearly 80% of Canada's population growth and the volume of
immigrants is expected to expand by more than 400,000 annually from
2021 to 2023. The company estimates an addressable market of more
than 430,000 new immigrants and international students annually in
its three current markets, representing potential lease-value
capital opportunities in excess of C$70
million. Across all of Canada, Solution projects a C$100 million annual lease-capital opportunity
for its target market, with white glove service and a focus on
luxury products.
Solution Financial is focused on building an in-house portfolio
of limited edition and high demand luxury vehicles for lease
brokering. As of the end of calendar 2020, the company had a 60%
net equity position in its vehicle portfolio, which is well above
its public peers, which tend to be more focused on traditional
subprime automobiles. As of April 30,
2021, it had 293 vehicles in its portfolio, a net decrease
of eight vehicles. More than 67% of its inventory held a residual
value greater than C$55,000 and 14%
of the total held a residual value above C$150,000. Over recent quarters, the company made
the strategic decision to support top-line sales by selling certain
vehicles at a premium, this due to higher demand amid a shortage of
new vehicles (caused by the limited availability of certain
microprocessor components).
As of the second fiscal quarter of 2021, the total value of the
lease portfolio was C$23.4 million,
which is below the peak of nearly C$25
million in fiscal 2020. As conditions begin to normalize
post-pandemic, we expect the portfolio to expand in number and in
gross transaction value, and view Solution Financial as well
positioned to return to pre-pandemic growth rates above 18%. This
growth should be driven by expansion into new markets, led by
Ontario.
Given the favorable expansion prospects for immigration and
student populations in the company's target markets, Solution
expects to expand its portfolio to more than C$100 million by the end of calendar 2023. It
anticipates this threshold will serve as validation of its business
model and attract attention among banking industry participants as
a potential acquisition target.
COMPETITIVE ADVANTAGE:
Solution Financial's business model is based on a proprietary
online technology platform that is designed to generate leasing
quotes more quickly and efficiently for a network of partnered
luxury/ultra-luxury automotive dealerships as compared with
traditional third-party lease quoting platforms.That, in turn, is
intended to drive business to Solution Financial. Under this model,
the company does not take on significant marketing expense for
customer acquisition.
The business model is unique because the company is built upon
an expertise and passion for luxury vehicles, as opposed to the
more-traditional banking foundation. Solution also has a
significant understanding of the premium and limited brands that
are in highest demand and that are multi-generation vehicles (which
carry value long after traditional vehicles have depreciated beyond
a lease life cycle). By knowing this after-market inventory,
Solution Financial is able to get a premium value from the vehicles
and maintain residual value over an extended period.
We view the above as a barrier to entry, as Solution Financial's
ecosystem, which focuses on flexibility and has taken years to
develop, is atypical for current leasing industry participants.
Most traditional subprime automobile lenders primarily focus on the
customer's credit history and the liquidation value at auction or
scrap, which can result in significant reserves and credit losses.
In addition, Solution has established relationships with luxury
vehicle dealerships in its target markets, and those dealerships
direct customers directly to Solution. That process cannot be
easily or quickly replicated by competitors. Lastly, the company
takes on customers that traditional banks and insurance companies
may not (such as high-deductible insurance leasees).
Another key differentiator in Solution Financial's business
model is its ability to provide customers with short-term
flexibility in their leasing options. The company proactively
reaches out to clients to allow for regular upgrades without
assessing penalties for early termination, which is uncommon in
traditional leasing arrangements. As of April 30, 2021, the average remaining lease term
for the portfolio was 1.6 years, weighted by net book value for
each vehicle, which is below industry averages. Solution Financial
is able to provide such flexibility because it uses its expertise
to focus on luxury brands that have high demand and can easily be
re-leased.
Given its expertise in the luxury vehicle market, Solution
Financial is able to maintain an extremely low inventory of
unleased vehicles. Its average turnover time between leases is less
than one month, with a new leasing agreement often in place before
the current lease has expired. Further, customers are incentivized
to maintain the vehicles in order to build customer equity. The
equity can be used towards a future lease, building customer
loyalty while maintaining a high-quality and reliable
clientele.
Solution Financial is also well positioned to maintain minimal
levels of bad debt among its customers. All of its portfolio
vehicles have GPS trackers installed so that a vehicle can be
located and recovered, if needed. In addition, its customers
typically have other assets such as real estate that support
their ability to meet lease obligations, and are only lacking
employment and earnings history in Canada. Solution
also places an above-industry-average deposit when taking
possession of a leased vehicle to further ensure the leased assets
are appropriately secured. Solution also protects itself
financially by basing its leasing terms higher than the vehicle's
expected depreciation and residual value, this to ensure a healthy
rate of return. At the end of a vehicle's lease cycle history,
Solution Financial is able to sell a vehicle for a gain that is
typically about 7% over residual value.
Historically, leasing company comparables have been acquired at
an average valuation of around four-times price-to-book multiple.
While Solution Financial recently traded at a multiple close to
three-times, we would expect Solution to warrant a significant
premium upon pursuing an exit strategy, given its proprietary
system that is focused on luxury vehicles, minimal bad debt
exposure, and the high net equity position in its vehicle
portfolio. Further, we think that any M&A would likely leave
Solution Financial's management in place, given that team's
vehicle-focused expertise, ability to execute on its business
model, and instantly accretive contribution to an acquiring
company's earnings.
ANALYST COMMENTARY ̶ EARNINGS (Click
here to view Full Argus Equity
Report):
For the quarter ended April 30,
2021, net revenues increased 103% to C$5.6 million, boosted by a favorable comparison
over the prior-year period, during which the COVID-19 pandemic took
hold. Adjusted net income for the former period was C$239,094, and the quarter represented the tenth
consecutive profitable quarter, despite pandemic-related
disruptions to vehicle sales and the in-person closures of
universities (which contributed to a 4% decrease in the total lease
and finance portfolio, to C$23.4
million year-over-year). Despite these challenges, the
company maintained positive cash flow from operations of
C$2.6 million for the six months
ended April 30, 2021, compared with
C$2.8 million for the prior-year
period.
In a normalized operating environment, Solution Financial's
business model has several inherently favorable characteristics
that we expect will contribute to growth. First, the company leases
vehicles at a higher financing rate than the expected depreciation
in its portfolio. This supports an above-industry-average gross
margin of 26%-35% and effective rate of return of approximately
14%. As well, the company has increased operating income at a
higher rate than operating expenses, driving expanded operating
margins. Since the first quarter of fiscal 2019 (January 31, 2019), operating income has increased
roughly 80% (to C$1.88 million in the
quarter ended April 30, 2021), while
operating expenses have increased by only 35% over the same period
(to C$676,000).
Further, the company's expansion into new markets in
Alberta and Ontario should drive top-line growth in a
low-overhead environment, with penetration among a small number of
luxury dealerships requiring minimal marketing spend. Lastly, the
company has shown tight controls over its share count. Since the
first quarter of fiscal 2019, shares outstanding rose by a modest
14%, to 90.3 million shares from 78.9 million. That should provide
earnings leverage, as the company resumes a normalized net-income
growth trajectory.
Recently, the company has been distributing C$0.001 per share on a quarterly basis, which
equates to an annual dividend yield of 1%, based on a recent stock
price and market capitalization of C$0.42 and C$37
million, respectively.
About Solution Financial Inc. (TSXV:SFI)
www.solution.financial
Solution Financial Inc. engages in the retail sale, leasing, and
financing of high-end automotive vehicles, boats, and commercial
equipment in Canada. It also
involved in the end of lease sales activities. The company serves
new immigrants, business owners, and international students.
Solution Financial Inc. was founded in 2004 and is based in
Richmond, Canada.
For more information re: SFI please contact:
Sean Hodgins
Chief Financial Officer
sean.hodgins@solution.financial
778.318.1514
About Argus Research Corp.
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dstone@argusresearch.com
Argus Research Co. has received a flat fee from the company
discussed in this report as part of a Sponsored Research agreement
between Argus and the company. No part of Argus Research's
compensation is directly or indirectly related to the content of
this assessment or to other opinions expressed in this report.
Please refer to the full Argus report and the disclaimer for
complete disclosures.
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