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Chesswood Group Limited (TSX:CHW) is well positioned to benefit from a boom in equipment financing opportunities.

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Chesswood Group (TSX:CHW) is North America’s only public company focused exclusively on commercial equipment finance for small and medium-sized businesses. The company’s primary continuing operations are conducted through three subsidiaries called Pawnee, Tandem and Blue Chip. Pawnee finances micro and small-ticket commercial equipment in the United States (U.S.) through the third-party broker channel. Tandem sources micro and small-ticket commercial equipment originations in the U.S. through the equipment vendor channel. Blue Chip finances commercial equipment across Canada.

The company has a price to book ratio of 1.21, dividend yield of 2.6% and market capitalization of $149 million. Debt is very high at Chesswood as evidenced by a debt to equity ratio of 4.45. The company has excellent performance metrics with an operating margin of 29.84%.

The company’s largest operations are conducted by Pawnee, which accounts for 84% of consolidated revenues. Pawnee specializes in providing equipment financing of up to $250,000 to small and medium-sized businesses in the U.S., with a wide range of credit profiles from startup entrepreneurs to more established businesses, through a network of approximately 600 independent equipment finance broker firms.

Pawnee limits the transaction size for non-prime businesses as one measure of risk mitigation. These non-prime market niches are not usually served by most conventional financing sources, as they have a generally higher risk profile. To manage the incremental risk associated with financing businesses in these niches, Pawnee’s management has built a stringent operating model that has historically enabled Pawnee to achieve higher net margins than many typical finance companies. The gradual expansions in Pawnee’s product offerings have allowed it to become a much more important source of funding to broker customers.

In early 2019, the company launched Tandem, located in Houston, Texas, which offers equipment financing for small and medium-sized businesses of all credit profiles through equipment vendors and distributors in the U.S. While the vendor channel has a longer sales cycle than the traditional third-party channel, equipment vendors and distributors generally form long-term partnerships with funders which usually result in programs that generate originations and revenues over many years.

In 2019, Tandem originated $31 million in financing and was supported by Pawnee’s credit, documentation, collection and administrative departments which provides back-office support to Tandem.

Chesswood’s Canadian operations are conducted by Blue Chip, a company that specializes in micro and small-ticket equipment finance for small and medium-sized businesses. Blue Chip accounted for 15% of consolidated revenue. Acquired by Chesswood in March of 2015, Blue Chip has 30 full-time equivalent employees.

Located in Toronto, Blue Chip originates receivables across Canada which are sourced from a nationwide network of more than 50 independent equipment finance broker firms and through direct, and in-house origination efforts via equipment vendors. It derives substantially all of revenues from financing leases and loans and related service charges.

Recently, Blue Chip started to offer to a single source of commercial equipment financing across all credit classes. Blue Chip also provides financing to a small number of condominium corporations for building improvements. These secured loans typically have terms ranging from three to five years.

Chesswood is well positioned to benefit from a boom in equipment financing opportunities.

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 Nikhil Kumar has no position in any of the stocks mentioned. The Motley Fool recommends CHESSWOOD GROUP LIMITED.

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