Grey Horse Corporation

We all love a cheap company. Something trading at less than tangible book and well under 10 times owner earnings. I wish I could find 10 of these companies to fill my portfolio. Well, that doesn’t happen much, unless the world is on the edge of disaster. Perhaps I will post/rant about our “experts” another time, (I hope nobody is holding their breath for Roubini’s prediction for the S&P 500 to go to 600). 

Enter Grey Horse Corporation (GHC on the TSX), from their website:  

“Grey Horse Corporation (Grey Horse) is a Canada-based financial services company serving the corporate and institutional clients. The Company provides stock transfer, corporate trust, foreign exchange, corporate secretary and compliance services through the equity group of companies. The wholly owned subsidiaries of the Company include Equity Transfer & Trust Company (ETT), Equity Foreign Exchange Services Inc. (EFX), Equity Corporate Services Inc. (ECS) and Equity Securities Inc. (ESI). ETT provide transfer agent and corporate trust services to issuers in North American capital markets. EFX is engaged in providing foreign exchange brokerage services. ECS is engaged in providing corporate secretary and regulatory compliance services. ESI provides limited market dealer (LMD) services to the issuers.” Grey Horse is not dirt cheap, it not trading at a discount to book value. It is a small company with growing (accretive) earnings with high ROIC, no debt, and an incentivized management team.

As mentioned, there are essentially 2 operating segments: Equity Transfer & Trust (ETT) and Foreign Exchange Services (EFX). Equity Transfer, which includes the ETT, ECS and ESI operations:    

  • ETT has 2 divisions, transfer agent and corporate trust. As of Q1 2010, transfer agent now has over 600 clients. Most transfer agent revenue is large and recurring. Corporate trust revenue is comprised of 2 factors (other than sheer volume), fees and margin income. 2009 fee income is stable vs. 2008, where margin income is affected by interest rates, so year over year they are down. Both of these divisions are effected by capital market conditions and interest rates.
  • ECS focuses on corporate secretarial, regulatory filing and whistleblower services mainly for small companies in Vancouver and Calgary. This division compliments ETT and gives Grey Horse the geographical reach to western Canada.
  • ESI assists on placing investments for clients, in which Grey Horse earns a spread.
  • Current revenue is around 16 million (65% of total) and has EBIT margins in the mid to high teens. Revenue growth should exceed GDP easily.
Foreign exchange Services (EFX)  
  • Provides foreign exchange consulting including spots, options and forwards. Can be regular or one time purchases by clients.
  • Acquired Toro in 2008 and has dramatically improved results. The Toro acquisition seemed to be at quite a reasonable price.
  • Current revenue of over 6 million and EBIT margins well over 20%.

As you can see, both divisions compliment each other and should continue to grow revenue as the economy picks up and capital markets become “looser”. Looking at valuations on a consolidated basis (share price of $6.35):   

  • Current P/E of 13, with net cash P/E of just under 10.
  • Same with FCF, which I include expenditures in intangibles.
  • With a 15% cost of equity, EPV comes in at $8.90, or almost a 25% discount.
  • DCF with a straight 15% growth in owner earnings, 15% discount rate and 50% margin of safety, yields fair value at $9.60.

Not extremely cheap, but fair. This isn’t a company that has had revenue cut in half or some substantial overhang, so maybe the market is right on this one. Let’s look at management ownership:  

  • Total ownership is around 18%.
  • CEO owns 6%.
  • Other major shareholders are Mawer Investment (12%) and Whitecastle (11%). Whitecaslte also has a member on the board.  

We have a company with fair value at $8-10, giving an upside of at least 30%. That doesn’t seem like too much given how many companies are trading at cheaper multiples. But what I am getting in Grey Horse is “optionality”. Let me explain… Earlier in the year GHC announced that they would become a deposit taking institution (DTI) and enter the Canadian mortgage market. The market liked this news and the stock quickly went from $5.40 to $7.40 almost overnight. Later topping at almost $9.00. Nick Kyprianou joined as President of mortgage operations and invested 1 million dollars of his own money for shares at $5.25. The goal is to focus on the alternative mortgage market. 

The other bit of optionality that I see potential in is if GHC wins a big client. Given GHC’s small size, one big client can significantly boost revenue (and earnings), whether it is the corporate trust or foreign exchange divisions. 

Given how low interest rates are and how much uncertainty there still is in the economy, I think GHC makes a nice addition to my portfolio. Fair priced but profitable, with some optionality. Don’t forget management with some skin in the game. I believe that anything under $6.50 is a buy.


Author is long GHC at time of writing. 

Lastest Investor Presentation 

Company website

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