Exchange Income Corporation is a diversified, acquisition-oriented corporation focusing on opportunities in aerospace, aviation, and manufacturing. The corporation enjoys a diversified revenue stream from businesses ranging from medevac transportation services, aftermarket aviation parts, to communication tower construction, high-pressure water cleaning systems, and precision metal manufacturing, and more. Its Provincial subsidiary is a global leader in maritime surveillance servicing governments around the world.
Exchange Income owns a unique group of companies in the aviation and manufacturing sectors. It offers a wide range of operations within the aerospace and aviation industries including providing scheduled airline, charter service, and emergency medical service to communities located across different regions. The corporation also provides a variety of manufactured goods and services in a number of industries and markets throughout North America.
The principal operating subsidiaries of the Corporation are Bearskin, Calm Air, Custom Helicopters, Keewatin Air, Provincial Aerospace, Regional One, Quest, WesTower, Ben Machine, etc. Exchange Income’s segments are Aerospace & Aviation (~57% of Q1 2020 consolidated revenues) and Manufacturing (~43%).Investment Data
- Opportunity Score: 52
- Ticker: TSE:EIF
- Sector: Industrials
- Industry: Airlines
- Market Cap: 1.38B
- P/E: 39.60
- Dividend Yield: 5.83%
- Payout Ratio (Earnings): 230.30%
- Canadian Dividend Aristocrat: YES
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
- Dividend Growth Fit: 6/10
- Dividend Income Fit: 7/10
Revenue Growth & Market Exposure
Exchange Income enjoys a diversified revenue stream from different markets and geographies around the globe. These businesses have recurring revenue streams throughout their business cycle and the distinct nature of businesses adds diversity during times of any fluctuations. It is in a good position to expand its service offerings to customers given its multiple diversified subsidiaries. The company caters to governments, First Nation Communities, other companies, and individuals. It should also benefit from high levels of defense spending worldwide and steady economic recovery in its markets. The corporation continually invests to increase infrastructure to support its operations, additional aircraft, and base, and for the replacement of production equipment or components.
Exchange Income grows by acquiring quality businesses characterized by strong management teams, generating steady cash flow, and being immediately accretive to its earnings. Its acquisition of Quest Windows has significantly contributed to growth in recent years. Exchange Income’s recent acquisitions include that of Window Installation Specialists, in July 2020. The acquisition of WIS will further enable Quest to take advantage of the enhanced production capacity at the new facility in Texas. The company continues to win new contracts. Provincial successfully bagged a 10-year contract for the Netherlands Ministry of Defence and will provide and operate two Dash-8-100 aircraft for surveillance services.
Both Aerospace & Aviation and Manufacturing segments were materially impacted by the COVID-19 pandemic as a result of travel restrictions and temporary plant shutdowns. Revenues declined by 25% YoY, during the second quarter. EIC generated positive cash flow and operating results are also recovering. Its freight, medevac, and charter revenues were not as adversely affected as passenger traffic revenue and have returned to near-historic levels. Exchange Income’s manufacturing businesses also proved to be quite resilient with strong demand from Quest, Stainless, Ben Machine, and WesTower. The Regional One subsidiary was the most impacted by COVID-19. The company is expecting a quarter over quarter improvement in its consolidated results as its Northern aviation business strengthens.
Exchange Income has one of the best track records of dividend growth on the Canadian stock exchange. A diversified business model, disciplined investment, and acquisition of companies with steady cash flows have supported dividend growth over the years. The year 2020 marked the 15th annual dividend increase in a row for this dividend aristocrat. The corporation last raised its dividend payout by ~4% and has compounded them at 5%+ per annum over the last five years. It sports a juicy dividend yield of 6.75% but a high payout ratio. Exchange Income has generated consistent annual returns of over 20% in the last fifteen years.
Exchange Income had renewed its NCIB in February 2020 but has decided to conservatively manage its liquidity and not make purchases under the NCIB due to uncertain times created by the COVID-19 pandemic. The company, however, continued to pay dividends in the pandemic, proving the resilience of its business model and subsidiary operations. It took initiatives like controlling expenses and managing capital expenditures and working capital which supported dividend payments and paying down the debt.
Exchange Income’s diversified companies provide a resilient cash flow stream that facilitates its dividend to grow. The company has experienced double-digit growth in each of the last five years. It also stands a good chance to benfit from the growing demand for communication infrastructure. Future growth is expected to be driven by existing operations, acquisitions, and major capital investment. The acquisition of WIS will facilitate future growth at Quest, and PAL should benefit from the new long-term relationship with the Netherlands Department of Defence. Its long-standing strategy of acquiring and successfully integrating diversified businesses not only mitigates risks but also provides opportunities for growth.
Exchange Income faces competition from domestic as well as international companies. Air Canada, Westjet Airlines, Chorus Aviation, Canada Jetlines, Ace Aviation are Exchange Income’s leading competitors. These are leading airline companies in Canada. Exchange Income’s strategy of acquiring companies that operate in the milder competitive environment and offer niche services in remote areas makes it an unparalleled leader.
Exchange Income’s diversity and flexibility have positioned it better than the other traditional airlines. The company should benefit from volume improvements as travel restrictions begin to ease across national and international borders. The company was able to maintain its dividend and improve its cash position despite these challenges. Exchange Income is a good income generating stock with huge growth potential, strong dividend history, and decent balance sheet. Organic growth and contributions from acquisitions should drive earnings growth and support future dividend increases.