VersaBank has lots of upside, says LodeRock Research

Analyst Greg MacDonald of LodeRock Research likes the growth potential of fintech name VersaBank (VersaBank Stock Quote, Chart, News TSX:VB), which MacDonald thinks is trading at an attractive valuation.

In a report issued Tuesday, the analyst gave VersaBank a one-year forward valuation range of between $9 and $10 per share, which could very well run higher if the company executes on the M&A front.

Canadian Schedule 1 chartered commercial bank VersaBank operates via a branchless model whose platform handles deposits and loans. The stock has traded in the $7.00 to $7.50 range for the past couple of years, aside from a pullback with the overall market in February and March of this year. Year-to-date, VB is currently down five per cent.

VersaBank last reported earnings on August 26 where its fiscal third quarter 2020 featured revenue of $12.4 million, down 12 per cent year-over-year, and EPS of $0.18 per share, down from $0.21 per share a year earlier.

On the Q3 results, management had said that while healthy, the financials reflected VersaBank’s decision to temporarily increase its cash balance due to the ongoing lack of visibility concerning the economic impact of the COVID-19 pandemic.

“Even during this unprecedented environment, VersaBank continues to generate the highest net interest margin amongst publicly traded Canadian banks. With better visibility into the economic effects of the pandemic, we have been steadily redeploying cash into interest earning loans. In particular, we are seeing renewed activity in our Point-of-Sale Loan and Lease business as Canadians have emerged from lock-down and resumed “big-ticket” discretionary purchases,” said David Taylor, president and CEO, in a press
release.

In his report, MacDonald estimated that after an EPS erosion of about six per cent in 2020, VersaBank should be back to gains of between ten and 12 per cent going forward.

“Recent 3Q20 results provide good insight on the post-COVID EPS profile. The bank is now steadily deploying cash reserves into loans and actually booked a PCL recovery in the quarter. Renewed point-of-sale loan activity should drive 4Q20 results while new opportunities in consumer mortgage and public sector projects support 2021+.”

MacDonald noted that while VB’s current dividend payout ratio is at 12 per cent, the company could double that and still be below the low end of the 30-50 per cent range for larger banks, which, if enacted, would drive the yield to above 2.5 per cent, making the stock more attractive for income funds, the analyst said.

“We found that [VersaBank’s] technology’s speed, flexibility and risk management benefits create sustainable stickiness and pricing power for the bank, something we think is under-appreciated by the market,” MacDonald said.

“Our investment thesis for this stock is that the technology model allows for higher than average double-digit EPS growth but with a risk profile that is at or below average for Schedule 1 banks. We see potential for +20 per cent upside to the stock in the next year based on existing estimates and total 50 to 80 upside in the medium term if the bank executes on M&A growth,” MacDonald wrote.

Disclosure: VersaBank is a clients of LodeRock Advisors