VB - Versabank

[bigbluffzinc]

Versabank - A small Canadian (branchless) bank trading at less than 5.5x next years pre tax earnings, 75% of book, & a return on retained earnings going forward north of 30% (earnings growth north of 30%), running on debt to equity at around 8.5x or ~40% of the leverage other Canadian banks employ & with stronger insider buying than I've ever seen in any other opportunity I've looked at.  (All my estimates)

 

I think it's misunderstood as being (over)exposed to Canadian real estate when it's really a secured lender (mostly small receivables with significant holdbacks) that is unlikely to incur meaningful losses even in a Canadian downturn.

 

Curious if anyone else has thoughts here as my exposure is pretty meaningful and would love to hear some push back.

[Philbert77]

So what are your thoughts on the whole VersaVault thing? I frankly am quite leery of any investing in blockchain/bitcoin ether nothingness currency.

Overall, it certainly looks like an intriguing opportunity. Then high insider purchasing is very compelling.

[bigbluffzinc]

Sure, so I don't think you really need to have an opinion on Versavault (at all) given the price/quality of their lending business but that hasn't stopped me from having one :)! 

 

I assumed no revenue growth from Versavault in my assumptions because I have no clue how successful/unsuccessful it will be.  Versavault is mostly an institutional product that has nothing (necessarily) to do with cryptocurrency.  I don't own crypto and have no interest in owning it but Versavault is a secure way of storing digital valuables.  It can store the naked photos you keep on your phone in a more secure way (hopefully) than traditional methods and is intended to be on par with military grade digital security.  This might be important for some people (probably no one on this forum...) & I know zero about the integrity of that claim but that is the service/product they are providing & I just assume it's a reasonable product.  Businesses requiring cryptocurrency liquidity for one reason or another that don't have an in-house system for storing it (poker sites/etc) may find the service valuable but again, that is just one use.  I haven't seen many other products marketed like this yet which is interesting and the Vault is going to be marketed to people who consider themselves to have a digital valuable and are willing to pay for security.  I don't have a view on any cryptocurrency and don't view this investment as taking a view...  Again it can serve as a storage method for celebrities who want to tuck away their naked third girlfriends photos among other things...  But I do think people will continue to have digital valuables and as a result this service/product will probably continue to have some relevance if it can gain traction.  If it totally fails that's baked into the assumptions...  If it's a winner then investors do better.  Fine with me.

 

I view the insider buying as reassuring that this investment is exactly what it looks like. 

 

The compelling part is that earnings are growing 40% year over year and they have a ridiculously long runway...  And I'm getting that earning stream at 5.5x and less than book.  That sounds broken.  I know some people are allergic to small businesses but tbh I never thought opportunities like this existed in the public markets.  Still waiting for someone to come hit me over the head and say I messed up my math.

 

Still very long Versabank & looking for a reason to change my mind.

[SnarkyPuppy]

Have you found a clean and easy way of viewing insider buying for canadian companies?  I find sedi.ca so unbearable. 

[siddharth18]

Have you found a clean and easy way of viewing insider buying for canadian companies?  I find sedi.ca so unbearable. 

 

I use https://www.canadianinsider.com/node/7?menu_tickersearch=VB+%7C+VersaBank

 

Just sign up for a free account and you can view data beyond 6 months.

[bigbluffzinc]

Core earnings growth of 53% y/y for Q4 with core earnings ROCE of 13.55%.  My understanding of the company leads me to believe this growth/subsequent improvement to ROCE will continue but the stock still trades at a discount to book. 

 

Anyone else with an opinion?

 

https://www.versabank.com/wp-content/uploads/2018/11/VB-Q418-Earnings-Release_vF.pdf

[oracle13]

For 2017:

Net Income: 19.5M

Total Executive Compensation: 4.5M

 

That is over 20%. Does this seem right?

[bigbluffzinc]

I think you need to strip out the severance package for Jonathan Taylor to get steady state executive comp, that was $878,132.  Management is still well paid here but it's not egregious.  The other thing you have to adjust for is the fact that all performance components are being met because the business is hitting out of the park.  If you compared this to a business that isn't growing margins and revenues in a meaningful way I'd view that as unfair.  If the business slows down and targets are missed you'd have as much as $1,180,000 in performance comp missing.  After taking those two together that's 50% of the comp.  I don't think that number would be excessive & I'm fine paying a premium for margin expansion and ~50% earnings growth.

 

 

[valueinvestor]

Versabank - A small Canadian (branchless) bank trading at less than 5.5x next years pre tax earnings, 75% of book, & a return on retained earnings going forward north of 30% (earnings growth north of 30%), running on debt to equity at around 8.5x or ~40% of the leverage other Canadian banks employ & with stronger insider buying than I've ever seen in any other opportunity I've looked at.  (All my estimates)

 

I think it's misunderstood as being (over)exposed to Canadian real estate when it's really a secured lender (mostly small receivables with significant holdbacks) that is unlikely to incur meaningful losses even in a Canadian downturn.

 

Curious if anyone else has thoughts here as my exposure is pretty meaningful and would love to hear some push back.

 

I think it's solid, but not sure where you are getting the 5.5x next year's earnings, but if they are able to grow earnings by issuing rational loans and curtailing costs, then it is a solid investment. I think it is pretty much a show me story. If I was able to study the underlying fundamentals of these loans, then it would have been a big investment for me. When I invested at ~0.5x P to TBV, which I think it was $4-$5 range, even though I thought it was incredibly cheap, I still only invested 5% of my portfolio. Reason being, most of the tangible book value came from the loan, as the cash on hand covered all of Versabank's liabilities. Let say if the loans were not what Versabank stated on the books, it did not matter, as I assigned a value of zero to 50% of their loans issued. However, I sold out when it was trading 1x book.

 

To put this another way, if someone is selling me a portfolio of loans for $1.00, but I cannot do due diligence, nor does the seller provide any guarantee to the creditworthiness of said loans, then for my taste, I think 0.75 per share is too high. However, if someone who is selling me a portfolio of loans that I know for a fact is worth a $1.00, then I think 0.75 is a great deal, and 0.50 is a steal!

 

I guess what I'm asking, any chance you know the loans are worth $8-$9 a share?

[bigbluffzinc]

I think it had ~137.5m market cap when I wrote that or I just made a small mistake.  25m pre tax at 5.5x is $137.5m.  Current market cap is ~152m.

 

I have no insight into their real estate book other than (low) historic default rates which people concerned with Canadian housing would take issue with (understandably).  I'm less concerned about their portfolio given its geography/performance but obviously it could wind up having bad surprises. 

 

I do have some insight into their receivable purchase program.  Versabank retains a cash holdback 5 times the worst loan loss experienced by the borrower in the last 10 years as a buffer.  If one of the loans goes into default for 90 days Versabank sells the loan back to the vendor at cost and takes no loss or reduction on the value of the receivable.  That is my understanding based on the work I've done.

 

That in conjunction with their historic loan loss ratios gives me confidence I'm getting more than 75 cents on the dollar for these loans.

 

I get the historic growth rate (which I believe is structural and will continue) for free.

 

Time will tell.

[valueinvestor]

I think it had ~137.5m market cap when I wrote that or I just made a small mistake.  25m pre tax at 5.5x is $137.5m.  Current market cap is ~152m.

 

I have no insight into their real estate book other than (low) historic default rates which people concerned with Canadian housing would take issue with (understandably).  I'm less concerned about their portfolio given its geography/performance but obviously it could wind up having bad surprises. 

 

I do have some insight into their receivable purchase program.  Versabank retains a cash holdback 5 times the worst loan loss experienced by the borrower in the last 10 years as a buffer.  If one of the loans goes into default for 90 days Versabank sells the loan back to the vendor at cost and takes no loss or reduction on the value of the receivable.  That is my understanding based on the work I've done.

 

That in conjunction with their historic loan loss ratios gives me confidence I'm getting more than 75 cents on the dollar for these loans.

 

I get the historic growth rate (which I believe is structural and will continue) for free.

 

Time will tell.

 

Never mind, I think you have it right, going off memory. I typically include taxes as an expense, when calculating earnings. Especially since there NOLs has been used I think, no?

 

 

[bigbluffzinc]

At the end of the day taxes are an expense and I include them too but when I'm doing my own work (comparing opportunities) I'm using pre-tax numbers so things are standardized and faster.  When I use after tax numbers unless something is going on (NOL's/advantaged industry/tax credits/etc) I standardize the tax rate for my own comparative purposes.

 

Might be a mistake.  Just being honest about what I'm doing.

[valueinvestor]

At the end of the day taxes are an expense and I include them too but when I'm doing my own work (comparing opportunities) I'm using pre-tax numbers so things are standardized and faster.  When I use after tax numbers unless something is going on (NOL's/advantaged industry/tax credits/etc) I standardize the tax rate for my own comparative purposes.

 

Might be a mistake.  Just being honest about what I'm doing.

 

That’s perfectly understandable.

[valueinvestor]

What do people think of the new VCAD stablecoin currency? Took a nibble when it announced. It seems it's 18x 15x earnings and 1.25x Book. However, NIM is around 2.9 and ROA is 1%.