This company is a diversified, acquisition-oriented corporation focused on opportunities in aerospace, aviation services and equipment, and manufacturing sectors. Its business plan is to invest in well-established companies in niche markets that are profitable and report strong cash flows.
Its share price has increased 34.71% since the beginning of the year, exceeding the 15.42% increase of the S&P/TSX Composite Index. The company I’m referring to is Exchange Income (TSX:EIC) which operates subsidiaries such as Perimeter Aviation LP, Keewatin Air LP and Custom Helicopters Limited, to name a few.
An interpretation of the numbers
Looking at Exchange’s balance sheet, a couple of things stand out. First, its assets have increased $174 million since fiscal year-end 2018 from $1.957 billion to $2.131 billion, which exceeds the growth in total liabilities of $167 million. This means the company added $7 million to its shareholder equity — a good sign.
It also adopted IFRS 16 during this period, which reclassifies certain leases the corporation has for accountancy purposes.
Exchange’s revenues increased $44 million in this period (driven by its aerospace & aviation division), resulting in a growth in net income of $1.2 million. The additional $44 million came with additional general and administrative expenses of $8 million, which takes away from the bottom line.
The company reported an ending cash balance of $33 million (down from $85 million the prior year) for this period — an acceptable balance given its access to additional liquidity. The company reported a growing operating cash flow, indicating strong cash from its main line of business.
But wait, there’s more!
There are a couple of additional pieces of information in the company’s notes that I believe are important for investors to consider.
First, the company has a USD credit facility amounting to $401 million that’s used by its EIIF USA division. This exposes the company to currency risks as the US and Canadian dollar fluctuate on a daily basis.
In order to mitigate this risk, the company has purchased derivatives that is uses to hedge risk (protect against changes in the conversion rate).
The company also renewed its normal course issuer bid (NCIB), granting it the right to purchase up to 1,567,004 shares (which represents 5% of the issued and outstanding shares as at January 31, 2019).
As of the end of the six-months ending June 30, 2019, the company did not make any purchases under its NCIB compared to 493,059 shares the same period last year.
Investors should keep an eye out on share repurchases, as it indicates senior management believes the share price is undervalued.
From an accounting perspective, Exchange does a good job of growing its asset profile, increasing revenue and delivering a decent net income. Despite its rather low cash balance of $33 million, the company’s ability to access additional funds through capital markets doesn’t adversely affect my perception.
With a derivative strategy in place to hedge against currency risk and a present, albeit under utilized NCIB, investors should keep a close eye for share repurchase announcements that reinforce its undervalued shares.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Chen Liu has no position in any of the stocks mentioned.