Description

Accord Financial is a lower mid-market asset-based lender in Canada and the U.S. that was founded 40 years ago (originally as a factoring business), has been profitable for the past 36, has been paying dividends in the past 31, has compounded at 11% CAGR + dividends + a special one-time dividend, and is managed by people that are smart straight-shooters incentivized to be careful with their portfolio. After 10 years of +/- constant earnings (due to conservatism in a yield-hungry market), in 2017-2018 the company started growing wildly due to organic growth as well as a couple of great acquisitions. The stock is not getting enough credit for that growth spurt and today you can buy this promising diversified lender at 8x earnings and 1.2x tangible book.

History

ACD started as a Canadian factoring shop 40 years ago and entered the U.S. in the early 90s. Later they started to expand into other types of SME lending including inventory finance and equipment leasing.

After 2008, yield chasing in asset-based lending led ACD into a period of 9 years with bascially no growth. Not wanting to lower standards, they entered new areas and reinvested in their existing business including marketing, notably bringing all activities under the Accord brand and cross-selling products to increasing loyalty. In 2013 ACD began to implement a plan to diversify away from being 100% asset-based lending. Instead of being known mostly as a factoring shop, they wanted to be (and be known as) a broad-based commercial finance company. This was done partially organically and partially by making acquisitions where the founders/managers stayed on to manage the business. The company now has valuable expertise in areas like DIP financing and lending to other, smaller, lenders.

2017 was the year ACD began to finally grow again. In terms of capital structure this manifested itself simply as an increase in leverage. The ratio of funds employed/equity grew from 1.8 to 2.7 due to a combination of less competition, marketing efforts bearing fruit and the economy getting a bit better.

Also in 2017, the company made 2 transformational acquisitions that are bearing fruit, especially now in 2018:

1) For $10 million ACD acquired 90% of CapX, a U.S.-based provider of equipment finance to mid-market companies. CapX was managing a portfolio of assets but that portfolio was not part of the acquisition. Accord simply acquired the management team and they’re building a new portfolio from scratch. This is a very important acquisition of an excellent team that will help ACD expand further in the U.S. (currently ACD is still disproportionately active in Canada).

2) For $6 million ACD acquired 50% of BondIt – a movie and TV financing shop in Santa Monica that acts as a senor secured lender and underwrites each production they finance. Here again, the team stayed on board. This entry for Accord into this esoteric industry came to ACD by chance: BondIt was looking for financing and Accord liked the business. BondIt said they were actually looking for equity capital as well and a deal was born. The brilliant thing about BondIt is they have their own production company so if there are any issues, they can cushion the blow by utilizing their assets. The guys at BondIt are in their 30s and there is surely much growth ahead since they came in with a very modest portfolio.

This year ACD is growing even more, and all segments are participating. Revenues in Q1, Q2, Q3 were $10, $11, and $13 million, respectively. ACD arranged for itself a larger bank line and funds employed grew from $218 million at end 2017 to $299 million at end of Q3.

The company still faces significant competition, especially in the U.S., but they have no reason to alter their diligent, patient approach, especially now that they’re already growing very nicely. If capital markets return to a normal state (i.e. less competition) it’ll be especially exciting because ACD is very small relative to the market size.

Business Description

Here’s a listing of the Accord’s business lines:

(i) Asset-based lending (Accord Financial Inc.): factoring, lending against receivables, lending for inventory and lending for equipment. This is the oldest line of business, It grew 42% in 2017, and will perform similarly for full-year 2018.

(ii) Accord Small Business Finance (acquired in 2014 and renamed), a Canadian equipment financing and leasing business still managed by its founder. ASBF grew its funds employed by 66% in 2017 and this year continued to introduce new products, notably an equipment-based LOC product + a working capital loan product. They are doing larger and larger deals, up to $1 million, but are still offering smaller facilities like $50,000.

iii) CapX which was acquired in 2017 as mentioned above: they do mostly equipment financing, typically term loans up to 60 months

iv) BondIt, the other new company mentioned above.

v) Accord Financial Limited: credit guarantees and collection services. Most customers are retail chains. Unit still faces intense competition, especially when it comes to clients who simply want guarantees but not collections services.

Most of the facilities ACD provides are $1-20 million in size (lots of family businesses but sometimes even public microcaps). Usually the borrowers don’t qualify for bank financing because they’re underperforming or are in a special situation, or it’s part of an M&A event. ACD sources 20% of its business directly and 80% through various sources, including 10% commercial banks, 30+% brokers and 30% private equity sponsors (who are looking for financing for their investee companies).

Many of the PE sponsors are independent sponsors who are either buying spin-offs from larger corporations, turning a company around or want to grow a lot. Accord does not require equity from sponsors because it lends against asset collateral (although there might be capital from the seller). They simply try to assess the company’s management + the collateral. They’re looking for people who bought a company on the cheap and will be able to perform a hands-on turnaround. Using Accord is beneficial to the sponsors because they can move quicker – they talk to the credit committee directly and the deal closes quickly. The sponsors are willing to pay a good price for the debt because they’re getting lots of leverage they couldn’t otherwise get. They also appreciate ACD’s pragmatic, flexible

approach and generally trust the company.

ACD’s source of capital is mostly financial institutions in the U.S., Canada and offshore, and leverage is pretty low as mentioned earlier. The company states that since 2008 things have felt recession-like – an assessment that led them to be extra careful and forgo volume growth.

Management is down-to-earth, detailed, and are straight-shooters. The founder and chairman is Ken Hitzig and his son Simon is the new CEO (taking over from Tom Henderson who was not a family member). Management has a history of not only owning lots of shares but even lending to the company and paying a one-time $1.50 dividend in 2014. LTIP awards have a pool maximum are adjusted based on the Company’s ROE over the three-year vesting period of an award.

ACD also has a “Shareholder Value Council” - a group of a dozen senior executives (including owner-managers of acquired companies) that was formed a decade ago. The mission of the SVC is simply to increase shareholder value. Together they examine every important aspect of the business. It is divided into six groups of 2. Each group does research/planning and then shares results with the council quarterly. The idea is to supplement the board with a mechanism that is more hands-on and creative, with experienced executives who are exposed to the business every day.

Since 1978 the stock has returned 11% CAGR + dividends. When making acquisitions ACD looks for a strong brand, uniqueness and most importantly, exceptional management that is (i) willing to stay to manage the business and (ii) in need of more capital to grow.

Valuation

Here’s a table with the company’s numbers over the past few years:
                       

This year The company ended Q3 with record numbers for funds employed, quarterly revenue and EPS. These have been growing for several consecutive quarters and the growth spurt is still ongoing. If we simply take a Q3 run-rate, forward EPS would be $1.24/share which translates to a P/E of 8 and 1.2x tangible book. This is a company currently doing 15% ROE with a pretty conservative set of assets and not that much leverage.

For this kind of conservative, profitable lending + the growth, the stock deserves to rise at least 50% right away and perhaps 100% by this time next year.

Risks

- Despite the face that in a down-cycle they have less silly competitors, the business is still pro-cyclical so macro is always a risk.

- Company still faces intense competition in the U.S. and yield are lower there, but they pretty clearly insist on not lowering their standards.

- May move slowly without a clearer catalyst like better IR

Catalyst

- Growth, and a steadier growth because of diversification

- The company needs to do more IR, and do it better, and as they grow, at some point they will

- They have also talked about wanting more liquidity in the stock