As I went through Gurufocus' 52-week lows list I found a interesting and profitable Canadian REIT Mainstreet Equity(MEQYF, Financial). It has over 9,000 residential units in prime locations throughout Canada. Mainstreet has been in business since 1998 when it started with 221 units. The company has, over the last 10 years, been profitable and free cash flow positive. It is one of those no-brainers, profitable and selling at a discount to estimated business value.
Key stats
Price: $29.91/share
Pretax Earnings: $7.14/share
Earnings Per Share: $5.40/share
Free Cash Flow Per Share: $2.07/share
15-year average earnings: $5.40/share
15-year average free cash flow: $4.09/share
P/E: 5.8x
P/B: 0.6x
P/Pretax Earnings: 5.8x
15-year average P/E: 5.8x
15-year average free cash flow: 6.0x
Business overview
The company focuses on the mid-market multi-family properties throughout Canada. Mainstreet looks for distressed mid-market properties that the company could turn around and make profitable again. This allows the company to acquire these properties for a far more reasonable price. Mainstreet looks for distressed properties that the firm can add value to. The company has been able to reduce operating costs through professional management, information systems and the use of energy-saving equipment. Mainstreet likes to cluster its buildings by purchasing a number of mid-market properties in a specific area.
Financials
For the six months ending in March 30, 2015 Mainstreet increased 14% to C$49.7 million and net income decreased 23% to C$1.8 million. Revenues from the Alberta segment increased 13% to C$32.5 million and fund from operating income increased 27% to C$0.66.
Valuation
Mainstreet is selling for around 5.8x pretax earnings, 5.8x earnings, and 0.6x book value. The company based on multiple valuation methods is selling at discount to estimated business value. Based the company earnings the firm is undervalued selling at low historical multiples. The company is selling for 5.8x its 15-year average earnings and 6x its 15-year average free cash flow. At 10x its 15-year average earnings would sell for $54.10 and at 8.5x 15-year average free cash flow would sell for $34.76. The company should sell for 10 times its current earnings and 10x its pretax earnings. Based on a multiple of 10 for earnings and pretax earnings the would sell for $54.00 and $71.40. When doing discount cash flow value for Mainstreet I used various above average discount rates. These various rates gave me a range of present value for the company.
Discount Cash Flow Value With Various Discount Rates:
- Present Value At a 15% discount is $63.46
- Present Value At a 17% discount is $55.27
- Present Value At a 20% discount is $45.76
Based on various valuation methods the company is undervalued and has an estimated business value range between $34.76 and $71.40 per share. The company has a current earning yield of 10% and a foreward rate of return of 22% and selling at a large discount to estimated business value.
