Well-Positioned to Navigate Headwinds from Falling Rates

• Client assets held by OLY were up 1.2% QoQ to $11.5B.
• Dividends remained flat QoQ, but increased 33% YoY to $1.80, aligning with our estimate.
• In Q2-2024, 54% of revenue came from interest on unallocated client capital in cash accounts at major Canadian banks, up slightly from 53% in Q2-2023. We believe the cooling economy, with easing inflation and a weakening labor market, should lead to additional rate cuts. As a result, we foresee a decline in OLY’s interest revenue in H2-2024, extending into 2025. This forecast is consistent with our earlier analysis, which factored in the normalization of rates, and recognized that the surge in interest revenue for the past two years was temporary.
• That said, we believe services revenue will be driven by 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 would allow it to actively market its services to potential customers in ON. 
• OLY’s EV/EBITDA is 7.9x vs the sector average of 12.3x, a 36% discount. 

 

Price Performance (1-year)

 

	YTD	12M
OLY	16%	27%
TSX	10%	17%

 

Primary Offerings

The leading Canadian custodian/ administrator of alternative investments

• 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 

OLY managed 132k accounts at the end of 2023; its platform caters to a comprehensive range of investments not supported by banks, and other traditional trading/investment platforms

In Q2-2024, 77% of revenue came from IAS (Q1: 76%), 10% from health service plans (unchanged), and the remaining 14% from other services (Q1: 13%)

Client assets held by OLY were up 1.2% QoQ to $11.5B. We are maintaining our 2024 year-end estimate of $11.8B 

 

Financials (Year-End: Dec 31st)

In Q2-2024, revenue was up 5% YoY amid higher interest rates, but missed our estimate by 4%. On a positive note, services revenue from IAS was up 3% YoY, driven by an expanded client-base

In addition, services revenue from the Health Services Plans division was up 6% YoY, driven by higher transaction volumes. Gross margins remained flat, but EBITDA and net margins declined YoY due to higher G&A expenses 

G&A expenses were up 11% YoY, due to higher bonuses and management fees, but aligned with our estimate

Q2 EPS was down 1% YoY, and 12% lower than our estimate due to the lower than expected revenue

Dividends remained flat QoQ, but increased 33% YoY to $1.80, aligning with our estimate. The payout ratio was 73% vs the historic average of 70%. Strong balance sheet

 

FRC Projections and Valuation 

As Q2 revenue missed our expectations, and the likelihood of more aggressive rate cuts than previously anticipated, we are lowering our 2024 EPS estimate by 12%, while maintaining dividends at $7.20/share

We are maintaining our 2025 and long-term revenue/EPS estimates. As a result, our DCF valuation decreased from $135 to $132/share

We are reiterating our BUY rating, and adjusting our fair value estimate from $134.83 to $133.70/share (the average of our DCF and comparables valuations), implying a potential return of 25% (including dividends) in the next 12 months. The next major catalyst for the stock will likely stem from OLY’s potential registration as a federal trust corporation.

 

Risks

Maintaining our risk rating of 3 (Average)

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