Description

All figures stated herein are in Canadian dollars.

Company Overview/Recent Developments

Olympia Financial Group Inc. (OLY) is an owner-operated Calgary, Canada-based firm that provides alternative investment-focused trust administration services through its wholly-owned, non-deposit taking trust company, Olympia Trust Company (Olympia Trust), which accounts for ~77% of OLY’s revenue. The company also has four complementary divisions (Private Health Services, Currency and Global Payments, Corporate and Shareholder Services and Exempt Edge) that account for ~23% of its revenue. OLY was founded in 1994 by current President, CEO and ~29.6% shareholder, Rick Skauge, and has offices in Calgary and Vancouver. OLY’s Private Health Services division (Private Health) (~10% revenue) markets, sells and administers health and wellness benefits to small business owners through Olympia Benefits, a wholly owned subsidiary. OLY’s Currency and Global Payments division (~9% revenue) facilitates foreign currency exchange for corporations and private clients at competitive rates, offering same-day transactions as well as long-term forward contracts. OLY’s Corporate and Shareholders Services division (CSS) (~3% revenue) provides transfer agent, trustee and registrar services to public and private issuers across Canada. OLY’s Exempt Edge division (~1% revenue) is a proprietary technology platform that was launched in 2016 to streamline the administrative, compliance and reporting obligations of issuers and exempt market dealers conducting private capital offerings in Canada.

In August 2021 and December 2021, Craig Skauge, son of OLY’s CEO, and current CEO/President of Olympia Trust, negotiated the transformative acquisition of ~40,000 self-directed registered and non-registered investment accounts from Community Trust Company and Computershare Trust Company. The timing of the two acquisitions was impeccable, as they increased Olympia Trust’s funds held in trust by ~65% to $9.6 billion immediately ahead of kickoff by the world’s leading central banks (including the Bank of Canada) of the fastest interest rate-hiking cycle in recent history. Although Olympia Trust is a non-deposit taking trust company, the company earns interest revenue on cash held in trust (which was $916 million as of 6/30/23) via government-insured term deposits and guaranteed investment certificates with Canadian financial institutions, and in my estimation, the two 2021 acquisitions coupled with CSS’s growth and elevated interests rates position OLY to earn ~$25 million (nearly 4 times its 2021 net income) in 2023.  Despite this explosion in earnings power (which has been demonstrated over the last several quarters), and more than doubling its monthly dividend with three big hikes since November 2022, OLY’s share price is only ~85% higher than it was upon completion of the 2nd acquisition above in late December 2021. 

Thesis

I believe the market is unfairly pegging OLY’s increase in earnings power as a one-off boon that will vanish once interest rates moderate. However, my view based on personal research and recent communication with management is that the earnings power increase is not only sustainable but expandable due to forward-thinking moves undertaken by the company and favorable industry tailwinds. For one, OLY relaunched CSS in December 2018 upon satisfying a 5-year noncompete after selling the division in 2013 and it’s clear from discussions with management that they wouldn’t have relaunched the division unless they believed they could surpass CSS’s prior peak revenue and net income of $10.3 million and $1.6 million attained in 2012. Since relaunching, OLY has rehired roughly half of the original CSS team (including original team lead, Dean Naugler, who has 23 years of CSS experience and is well respected within the industry) and CSS revenue increased by 112% in 2021 and by 49% in 2022 despite pandemic-related headwinds. Additionally, OLY nearly completely digitized its Private Health platform between 2014 and 2019, cutting costs and doubling the division’s profit margin from low teens to high twenties, and the company has recently introduced new products and services (wellness spending accounts, telemedicine add-on to its health plan offering and an expanded/enhanced mobile app) intended to turbocharge Private Health’s annual revenue which I believe can grow from $8 million to $12 million over the next three years. Separately, Olympia Trust has seen a surge in mortgage origination over the past year (at a clip of 600 new mortgages per month per the 2022 Annual Report) owing to the increased difficulty Canadian homebuyers have had qualifying for traditional bank loans amid elevated interest rates. I expect the foregoing developments to help offset any post-2023 step down in Olympia Trust’s interest income and boost OLY’s 2023 baseline earnings by 10-12% per year from 2024-2026. 

What’s more, Olympia Trust is the leading trustee in Canada that accepts private company securities and syndicated mortgages as plan assets in self-administered registered retirement savings plans (RRSPs) and tax free savings accounts (TFSAs), Canada’s equivalent of self-directed 401Ks and Roth IRAs. Olympia Trust has ~95% market share within this niche and only two small competitors, Odyssey Trust Company and Western Pacific Trust Company. Canada’s large banks and trust companies have deliberately sidestepped this space because it is compliance-intensive and requires customized infrastructure/technology like OLY’s Exempt Edge software. Consequently, OLY has an entrenched industry position and should benefit immensely from the global surge in the alternative investments market which is expected to nearly double between 2021 and 2026. Craig Skauge has been actively lobbying for democratization of Canada’s private securities market for 12+ years in his role as current and former head/member of numerous industry associations and will likely continue to do so for the foreseeable future. As of year-end 2020, Canadians held securities/funds worth an aggregate $1.83 trillion in their RRSPs and TFSAs. Olympia Trust currently houses ~0.6% of Canada’s aggregate $1.83 trillion held in RRSPs and TFSAs. However, I believe that over the next five years, as more Canadians become aware of the attractiveness of alternative investments as a complement to traditional investments, Olympia Trust can garner over 1% of Canada’s aggregate funds held in RRSPs and TFSAs and double its funds held in trust from $10.6B to ~$20B.

Industry/Regulation

Olympia Trust is a direct beneficiary of Canada’s increasingly permissive regulatory regime governing private securities offerings. Private companies, mortgage investment entities and real estate issuers sell private securities to individual investors under three principal exemptions made available via Canada’s National Instrument 45-106, the accredited investor exemption, the offering memorandum (OM) exemption and the family, friends and business associates exemption. Under the foregoing exemptions, Canada’s regulatory regime generally permits issuers to sell varying amounts of private securities (ranging from $10,000 to an unlimited amount) to individual investors depending upon the investors’ income, net worth, relationship to the issuer and whether or not the investor receives professional advice from a portfolio manager or dealer regarding suitability of the offering, without having to prepare and file a prospectus provided the issuer uses a compliant OM. Additionally, Canada’s Income Tax Act permits investors to invest in private securities offerings through their RRSPs on a tax deferred basis and TFSAs on a tax free basis which is the linchpin of Olympia Trust’s business model.

According to a recent report issued by the Ontario Securities Commission, private companies, mortgage investment entities and real estate issuers raised ~$2.7 billion from Ontario-based investors via private securities offerings in 2021 alone. Key reasons for using RRSPs and TFSAs to invest in private securities and syndicated mortgages as opposed to publicly traded stocks, bonds and mutual funds are that (1) private securities afford investors greater flexibility to invest in local companies or real estate projects with which they are more familiar, (2) private securities can be used to increase overall portfolio diversification and mitigate risk, (3) private securities and mortgages are less susceptible to extreme daily price fluctuations than public securities and (4) it is not uncommon to earn attractive double digit returns on these investments over time. The foregoing factors helped Olympia Trust grow its funds in trust consecutively for 15+ years, from $0.9 billion in 2007 to $10.6 billion as of June 30, 2023.

Olympia Trust Account Expansion Projections Applying Unit Economics

With roughly $10.6 billion of funds in trust across ~140,000 trust accounts, Olympia Trust’s average account size is ~$75.7K. Based on its current average account size, if Olympia Trust is able to add 14,000 new accounts per annum by 2026 due to elevated mortgage origination levels, increasing brand awareness and growing retail interest in alternative investments, that would represent ~$3.9 billion in additional funds in trust. Roughly 9% of Olympia Trust’s funds in trust are cash reserves and the 9% figure has been relatively consistent dating back to 2014. Assuming Olympia Trust has an incremental $351 million in cash in trust (10% of projected incremental funds in trust) by 2026 and assuming the prime interest rate in Canada by 2026 is 1.5% lower than the current prime rate of 7.2% and that the term deposits/GICs in which the company invests its cash in trust earn interest at a rate equaling ~75% of the prime rate (5.7% x 75%=4.28%) as they do today, Olympia Trust should earn ~$54 million/year in interest revenue by 2026. Separately, Olympia Trust generated ~$30 million in service revenue in 2022 from its 140,000 accounts, or $215 annualized per account, which is in line with the company’s fee schedule and amounts to the $150 annual administration fee plus $65 in miscellaneous fees each year. Accordingly, the company should be able to earn ~$39 million/year in service revenue if it attracts 42,000 new accounts by 2026 even assuming no increase in fee rates. With a current profit margin of ~28%, I estimate that Olympia Trust would be able to at least maintain the 28% margin with an additional 42,000 accounts due to its operating leverage and earn ~$26 million in net income on ~$93 million of anticipated 2026 revenue. 

Valuation

At a market capitalization of $208.6 million, OLY trades at 10 times TTM net income and 8.3 times my estimate of the company’s NTM net income. This is an attractive entry point for a company with OLY’s dominant market position, strong growth prospects and substantial insider ownership. As OLY’s earnings further increase over the coming quarters, I expect its share price to rise correspondingly. If OLY’s P/E multiple reverts to around 13 (its average over the past ten years) over the next year, OLY’s share price would climb to $135.07 if it achieves my projected 2023 EPS ($10.39/share) which represents 55.8% upside from OLY’s current share price (and a 64.1% total one-year shareholder return including the 8.3% dividend). Even assuming OLY’s trailing P/E multiple remains at the current depressed level due to a recession or skepticism around sustainability of OLY’s earnings increase, OLY’s share price would reach $103.90 if it achieves my projected 2023 EPS which represents 20% upside from OLY’s current share price (and a 28.3% total one-year shareholder return including the 8.3% dividend). OLY’s $15.1 million net cash position and 8.3% dividend yield also provide meaningful downside protection. 

Looking out three years, the period over which I believe Olympia Trust can add roughly 42,000 new accounts, my projected net income for OLY is $33 million, consisting of ~$26 million from Olympia Trust and ~$7 million from the four complementary subsidiaries ($3 million from Private Health, $2 million from Currency and Global Payments, $2 million from CSS and no contribution from Exempt Edge) based on their current growth trajectories. Applying an 8% discount rate to my projected 2026 earnings and multiplying it by OLY’s average trailing ten years P/E ratio of 13 gives me a present value of ~$340 million for OLY’s 2026 market cap or ~$141.31/share which represents 63% upside from OLY’s current share price (and an 88% total three-year shareholder return including the 8.3% dividend paid annually over the holding period, or alternatively a 23.4% CAGR). It’s also likely that OLY will increase its dividend over the next three years, as the company has a well-established history of maintaining a progressive dividend policy. OLY increased its dividend consecutively from 2002-2012 and paid a special dividend amounting to ~25% of its share price in January 2014 on the heels of its $43 million 2013 sale of the CSS division. In similar fashion, OLY has hiked its dividend three times in the past 9 months alone (a 29.6% hike in November 2022, a 28.6% hike in February 2023 and a 33.3% hike in August 2023).

OLY’s closest publicly traded competitors are Western Pacific Trust Company, a small, non-deposit taking Canadian trust company that custodies private securities and mortgages for tax-advantaged accounts, and TMX Group Limited, a large Canadian financial services company that offers corporate trust, corporate shareholder and transfer agency services in addition to operating equities, fixed income, derivatives, and energy markets exchanges. Western Pacific and the TMX Group currently trade at 5.5 and 22.9 times TTM net income, respectively. While these are good sanity checks on the reasonable range of P/E ratios for OLY, they aren’t especially instructive since Western Pacific ($4.3 million market cap) is significantly smaller and less varied than OLY and TMX ($8.5 billion market cap) is significantly larger and more varied than OLY. More applicable is data on TMX Group’s August 2021 acquisition of AST Trust Company (Canada), a leading Canadian corporate trust company and transfer agency, for $165 million or 14.2 TTM EBITDA. Given that AST Trust was close in size to OLY and offered comparable, albeit a less extensive range of services, it’s a better comp than Western Pacific or TMX Group. Applying a 14.2 TTM EBITDA multiple to OLY would give the company a $405 million private market valuation.

Risk Factors and Mitigants 

Risk Factors 

•  OLY’s success is dependent on the continuing execution and leadership of CEO and President, Rick Skauge, and Olympia Trust CEO and President, Craig Skauge  

•  Plan assets (private securities and mortgages) may underperform trust accountholder’s investment expectations, thus potentially causing account terminations

•  The Bank of Canada may lower its benchmark interest rate which could reduce Olympia Trust’s interest revenue generated from cash held in trust

Mitigants 

•  OLY insiders own ~34% of company shares and are economically aligned with minority shareholders

•  Significant growth runway with relaunch of CSS, Private Health growth initiatives and surge in mortgage origination

•  Olympia Trust has a near monopoly on funds in trust among Canadian trusts accepting private securities and mortgages as plan assets

•  Olympia Trust has grown funds in trust consecutively for 15 years

•  Strong balance sheet with net cash of $15.1 million

Disclosure

Catalyst

• 285% earnings increase from 2021 to 2023

• Significant growth runway with CSS relaunch, Private Health growth initiatives and surge in mortgage origination

• Further dividend increases

• Tailwinds from the mainstreaming of alternative investments