Navigating Rate Pressures with Core Service Revenue Growth

Report Highlights

On a positive note, total services revenue from core divisions (Investment Account Services and Health Service Plans) was up 1% YoY, driven by higher transaction volumes.

EPS was up 1% YoY, in line with our estimate, driven by higher margins, partially offset by the impact of lower revenue. Dividends remained flat QoQ, but increased 20% YoY to $1.80, also aligning with our estimate 

In Q3-2024, 54% of revenue came from interest on unallocated client capital in cash accounts at major Canadian banks. We expect further rate cuts by the Bank of Canada, driven by slower GDP growth, high unemployment, and cooling inflation. Consequently,  we expect interest revenue declining in the coming quarters.

Services revenue will likely continue benefiting from organic demand growth for alternative investments. OLY’s subsidiary, Olympia Trust Company, is currently in the process of registering as a federal trust corporation, which will allow it to actively market its services to potential customers in ON. 

OLY’s EV/EBITDA is 7.7x vs the sector average of 12.5x, a 39% discount. 

Price Performance (1-year)

Primary Offerings

• Investment Account Services (IAS): OLY is a trustee/custodian/administrator of self-directed registered investment accounts for alternative investments
• Health Services Plans: Administers health spending accounts for small/mid-sized corporations
• Currency and Global Payments: Facilitates the buying and selling of currencies for corporations and individuals
• Corporate and Shareholder Services: Offers corporate trust, and transfer agency services, such as maintenance of security holder registries, organizing annual meetings, and administering dividend reinvestments
• Exempt Edge: Provides IT services to exempt market dealers, issuers, and investment advisors 

The leading Canadian custodian/ administrator of alternative investments. OLY manages 130k+ accounts; its platform caters to a comprehensive range of investments not supported by banks, and other traditional trading/investment platforms

In Q3-2024, 79% of revenue came from IAS (Q2: 77%), 10% from health service plans (unchanged), and the remaining 11% from other services (Q2: 14%). Client assets were up 1.6% QoQ to $11.7B

We are raising our 2024 year-end estimate from $11.83B to $11.89B 

Financials (Year-End: Dec 31st)

In Q3-2024, revenue was down 1% YoY (H1-2024: up 7% YoY) amid lower trading volumes in the FOREX division, missing our estimate by 2% 

On a positive note, total services revenue from the company’s core divisions (IAS and Health Service Plans) was up 1% YoY, driven by higher transaction volumes. Gross and net margins improved slightly. G&A expenses were up 2% YoY, in line with our estimate

Q3 EPS was up 1% YoY, aligning with our estimate, driven by higher margins, partially offset by lower revenue. Dividends remained flat QoQ, but increased 20% YoY to $1.80, aligning with our estimate. The payout ratio was 69% vs the historic average of 70%. Strong balance sheet

FRC Projections and Valuation 

Although Q3 was largely in line with our expectations, we are raising our EPS estimates slightly on higher-than-expected client assets under administration. 

As a result, our DCF valuation increased from $132 to $133/share. Our comparables valuation increased from $136 to $137

We are reiterating our BUY rating, and adjusting our fair value estimate from $133.70 to $135.19/share (the average of our DCF and comparables valuations), implying a potential return of 34% (including dividends) in the next 12 months. The next major catalyst for the stock will likely stem from potential registration as a federal trust corporation. We believe the growth in core services revenue and stable margins highlight resilience amid a challenging environment.

Risks

We believe the company is exposed to the following key risks (not exhaustive):

• Operates in a regulated industry 
• The company's target market is niche 
• Although OLY dominates the alternative investment market, there is no guarantee that banks and large investment platforms will not enter this space in the future. 
• Earnings are significantly affected by fluctuations in interest rates
• Transaction revenue depends on market sentiment for alternative investments

Maintaining our risk rating of 3 (Average)

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