Tag Archives: GHC

EQI sold…

In a previous post I mentioned that I need to post my rationale for selling as well as buying. I sold out of 3 positions in 2011. So far one I look smart, one is too early to tell, and one I look like a bonehead. That’s EQI…

I sold out of EQI, formerly GHC, at $8.25. This was the very low end at what I thought EQI was worth. My thinking was that EQI was traded at a fair price, vs. slightly lower than fair price when I bought, and I didn’t have any real insight into the specialized mortgage market they were entering.

I bought around $6.40 and sold at $8.25. I held for just over 5 months. That’s a 29% return compared to the TSX at 11%. That sound good, but EQI has since jumped in price to almost $11. That’s missing the boat. EQI is a good business, maybe even a great business. They have quality management in the right industry (for now at least). They did execute all their initiatives and trade a well deserved premium. That’s were I struggle. I know cheap and kind of ugly. But this is closer to good/great quality at a fair price. More of a modern Buffett investment and my style is leaning to statistically cheap unless I really understand the industry.

I guess I’m happy with my position. I outperformed the TSX and I don’t think I took on any more risk. I can guarantee that there will be more stocks to run away right after I sell. After all, it is the curse of the value investor.


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Q1 2011 Performance, Updates and Thoughts


I have ended Q1 2011 almost at the exact same spot as I left 2010. Still trailing my target portfolio by almost the exact same amount. Though both me and the mock portfolio ended  up around 3.7% for Q1 2011. There has been some changes to the portfolio so I would expect the underperfomance to continue, especially if this rally in the equity market continues.


I have sold WJA, FES and EQI (formerly GHC). WJA was around 25% below my low end fair value. The same with FES. EQI was almost at fair value. None of the companies have done anything wrong, but I am finding better value in smaller names. I added to MGO and have bought a few new companies. I hope to have write-ups on them in the coming weeks.


The markets have had a very nice run. The higher they move, the less I like them. I start to get nervous about my holdings in large companies. QE2 is ending soon, and we will this economy on its own footing for the first time. I think that “the economy” is no longer a catalyst going forward. Picking specific companies that have their own internal catalysts will be more important than just plowing money into what’s hot. I don’t think that you will see another recession, but I doubt the mean reversion growth rates in GDP continue. Some large US companies are cheap and some look cheap. Looking back over the last 10 years you see excess. Excess borrowing and spending. I don’t think that profit margins and growth rates will look so rosy over the next 10 years. Profit margins are quite high and have the potential for mean reversion to the downside. With steady revenue and closer to normal margins will take away any margin of safety in the broader market. That is why I am focusing more and more on small companies with their own internal catalysts.

Given the extreme debt levels, a small increase in interest rates will dramatically increase the cost to service those debts. That’s money that won’t be spent further to buy more flat-screens, cars, or other discretionary items.


Japan was horrible. The damage isn’t completely tallied yet. The Nikkei is off 7-8%. That’s not really that much. Japan is not a long term investment. Their companies are not shareholder friendly. The have an even worse debt/GDP ratio than America. Their aging demographics are the worst in the first world. Japan would be nothing more than a sentiment trade. In order to minimize risk on that type of a trade you need panic. I don’t see panic. As soon as Buffett says “buying opportunity” you money flowing in whether it’s warranted or not. Maybe the eventual trade would be uranium, but again I see no panic.


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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. 

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