Analyst says Mainstreet Equity Corp’s (TSX:MEQ) unique business model drives cash flow per share growth
Capital Ideas Media | January 7, 2021 | SmallCapPower: Most Canadian investors have likely never heard of Mainstreet Equity Corp. (TSX:MEQ), but its stock price has quietly outperformed since going public 20 years ago – about 40% a year on average for the past 10 years and a nearly 60% average annual return over the last 20.
(Originally published on Capital Ideas Media on November 10, 2020)
Mainstreet Equity owns a portfolio of boutique (typically less than 100 units) rental apartments in Western Canada. The Company buys older buildings that have been neglected and/or mismanagement by their ‘Mom and Pop’ owners and renovates/retrofits these properties to minimize monthly maintenance costs while trying to maximize rental income potential through marketing and branding.
[Editor’s Note: Shares of Mainstreet Equity have risen more than 12%, and as much as 23%, since Capital Ideas wrote about the company less than two months ago.]
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Mainstreet Equity is not a REIT and doesn’t pay a dividend and thus, ploughs more of its profits back into the business for growth.
MEQ stock was hit hard during the COVID-19 lockdown in March, as a sliding oil price threatened the Western Canadian economy. Yet, Canaccord Genuity analyst Brendon Abrams initiated coverage on the stock recently with a “Buy” rating and a $91 per share target price, touting the Company’s “unique” business model that drives cash flow per share growth.
“We acknowledge the company’s exposure to resource-reliant provinces (Alberta and Saskatchewan represent 70% of net operating income) and higher leverage (14.5 times D/EBITDA vs peer average of 10.7 times) slightly elevates its risk profile relative to many of its apartment peers. However, in our view, Mainstreet represents an attractive opportunity for investors to gain exposure to Canada’s stable and defensive multi-family sector through a high-growth company,” the analyst wrote.
Mr. Abrams points to Mainstreet Equity’s “significant” liquidity position as providing capital to “consolidate its market niche, diversify its portfolio away from Alberta and Saskatchewan, and drive material increases in FFO per share.”
Mainstreet Equity CEO and founder Bob Dhillon owns 46% of the company he runs, so his interests are aligned with those of his shareholders.
Mainstreet Equity Corp. management believes in its business model, as it asserts that current market rents do not justify the high cost of new construction. Economic uncertainty is also driving more people towards the rental market.
Long-time Mainstreet Equity shareholders have benefitted from the Company’s tight capital structure (just 9.4 million shares outstanding). This has, however, made the stock illiquid and more suitable to smaller retail investors.
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