Description

Information Services Corporation (ISC) is a small-cap Canadian company. The business has a regional monopoly over registry services in the province of Saskatchewan. It has been written up twice on VIC, in 2015 and 2021, but we believe it deserves to be re-visited due to the new agreement with the Saskatchewan government, which allows for certain fee changes that are expected to add $17M in revenue (9% of total revenue) and $16M in EBITDA (27% of EBITDA).

Opportunity

Overall, it is a very simple business to understand. On a normalized basis, the business effectively grows top-line organically at ~2-3%/year (population growth + pricing), EBITDA at ~5%/year (assuming ~50bps/year of operating leverage) and EPS at ~8%/year. Part of the issue with the stock has been management’s mixed capital allocation / diworsification away from the high-quality registry services business. The deal with the Saskatchewan government is basically a financial leash on management. By forcing the company to lever up to pay $150M in upfront fees and $30M/year from 2024-2028, it limits the cash they can use to chase poor M&A deals over the next three years. There is an opportunity for the company to re-rate to ~$36/share (~50% upside) as the company delevers, which would place the business at ~10.5x 2025 EBITDA (inline with Teranet’s take-out multiple during the GFC).

Saskatchewan Government Relationship / Ownership

The company used to be a Crown Corporation and the Government of Saskatchewan retains a 30% stake in the business. The Government of Saskatchewan also owns 1 Class B share. The share does not represent any ownership in the business, but does prohibit the sale of assets outside of Saskatchewan, or the transfer of the headquarters out of Saskatchewan. Given the province’s presence in the business, we feel that it is highly unlikely that they will lose their registry monopoly. They currently are the exclusive provider of registry services until 2053.

Business Description

The company operates three business segments: Registry Operations, Services and Technology Solutions.

Registry Operations (48% of revenues in 2022) – 5% top-line growth until 2029

~65% of 2022’s registry operations revenue is linked to ISC’s operation of Saskatchewan’s land registry, which generates revenue on registration, search and maintenance fees. While growth will be challenged by a higher interest rate environment, leading to lower real estate transaction revenues, the number of transactions is surprisingly stable over time. Excluding the one-time changes associated with their new deal with the Saskatchewan government, volumes should grow at ~1% (inline with population growth) with revenues growing at 3%, as ISC is able to raise prices by CPI annually.

New Agreement with the Saskatchewan Government - ~30% tailwind to registry revenues

In early July, ISC announced that the Saskatchewan government agreed to a contract extension. Under the terms of the extension, ISC must pay $150M upfront and an additional $30M/year from 2024-2028 (total is $300M). The agreements allow ISV to adjust fees, which should result in an increase in revenue of $17M (28% of registry revenues) and EBITDA by $16M, due to the high incremental margins in this business. It also extends their contract with the government by 20 years to 2053 (original agreement was supposed to expire in 2033).

The agreement should lead to revenue growth of ~5% until 2029 for this segment.

Services (48% of revenues in 2022) - ~1% top-line growth

Amalgamation of different services (generally acquired via acquisitions), including incorporation services, KYC and asset recovery solutions. They are paid a fee per transaction. Regulatory solutions (e.g. KYCs) represents ~72% of the revenue within this segment.

While management believes that this segment grows from an increased propensity to outsource, growth appears tied to overall GDP. The segment has lower margins (low 20s) and is not expected to meaningfully grow. Management has made a number of acquisitions within this segment over the years (totaling $141M in consideration) – performance of these acquisitions has not been great considering current EBITDA is $20M (annualized from most recent quarter), resulting in a purchase price of 7x EBITDA, or at best a ~9-10% unlevered IRR on these deals. Existing leverage (~4x on an LTM basis) should prevent management from continuing to acquire within this vertical.

Management

The current CEO, Shawn Peters, was appointed in 2022 (was the CFO of ISC). Compensation is based on EBITDA, FCF and EPS, which explains the focus on M&A, despite mixed success. Starting in 2019, management started to receive Share Appreciation Rights, which might influence management to return capital to shareholders / pursue activities that are more accretive to shareholder value.

Management has a target of operating at a net leverage target of 2.0-2.5x. Post the new contract with the Saskatchewan government, that stands at ~4.0x, limiting their ability to use cash on misguided M&A.

Valuation

Trades at ~8x 2025 EBITDA. The acquisition of Teranet during the GFC should provide some color around an appropriate valuation (10-11x EBITDA). Re-rating to ~10.5x EBITDA represents ~50% upside to the current stock price.

Risks

• Once the target leverage ratio is achieved, management continues to acquire subpar businesses
• A crash in the Saskatchewan housing market

Catalysts

• New CEO uses excess capital after the leverage ratio is achieved to return capital to shareholders rather than pursue subpar M&A and market recognizes this new reality
• Change in compensation should reduce risk of poor capital allocation decisions

Conclusion

High quality business franchise where the deleveraging process will restrict poor M&A

Catalyst

• New CEO uses excess capital after the leverage ratio is achieved to return capital to shareholders rather than pursue subpar M&A and market recognizes this new reality
• Change in compensation should reduce risk of poor capital allocation decisions