Wednesday, May 30, 2007

A Closer Look at Two Income Trusts

Income Trusts - Park Your Money Investments featured a list of trusts from Income Trust Trader as well a few various people have mentioned to me. As of May 25th ITT's list has been updated.

They have a little more information, and their Monday post says they compute price trend values based on exponential moving averages and project those forward for a year. Expecting a pattern to continue for a year makes no sense to me.

First National AlarmCap (FNA) and UE Waterheater Income Fund have remained in the top two spot, although growth is now projected at 160% instead of 175%.

Since the post UE WaterHeater is up 1c or 0.04% and FNA is down 26c, but paid a 7c dividend for 19c down, or about 3% down.

A quick look at the fundamentals of FNA show that is $40 million market cap company that is the 3rd largest alarm sales, installation and monitoring companies. It has monitoring agreements generate $2.4 million monthly in recurring income. The previous 8 quarters show that the monitoring revenues have been declining, down about 5% in two year, and the number of clients is down 8-9% in that period. This raises a red flag.

A further look shows that the distributions have declined from $0.10833 to $0.07083.

FNA is paying a 13% dividend. They have identified problems that lead to losing customers and are working on reducing the loss of their client base. The dividend is about 70% of cash available so they have some cash to work on improvement. All things equal, when income trusts are taxed differently in 3-4 years, the dividend rate will decline to about 9%.

The downside risk is that as they lose customer base their overhead costs increase relative to their income and earnings decline faster than the rate of loss of clients. The opposite is true if they can grow their customer base. They appear to be in a strong enough position to turn around their attrition rate and they do have time.

For FNA the ITT's projection of 175% growth in a year seems highly unlikely, as does my simplified dividend ratio extrapolation that comes up with 75%. FNA seems fairly priced to me because of the declining customer base.

UE Waterheaters did not get included on the list I did because the dividend is 4.7%, well below my 7% cutoff. First glance is showing growth in earnings over the past 4 quarters. Checking further and there is a buyout offer at $23. It is trading at $22.79.

ITT's projection of 175% growth isn't going to work out on this one either.


CCH said...

Hi Deborah,

In your valuations models of FNA or other income trusts, do you factor in the liquation value?

I know of a few income trusts that are selling well below NAV. Where the street is pricing zero growth into their prices.

Deborah said...

I did not. What I looked at wasn't that kind of valuation, but the type of return I'd want in a dividend. FNA has a declining subscription base but they have identified stategies to try and turn it around. If they could fix their retention problems and maybe have some modest growth I would love this stock. A company that has a repeat business every month and a fairly solid repeat business, it is the type of business that could be cash for life.

I also didn't factor in that they could be bought out by a competitor. I think they are the 3rd largest in Canada.

What I saw in them is right now they are declining in sales and revenues and that can have a compounding effect on earnings going down. If they all of a sudden had to cut the dividend, the stock price would drop.