Growth Stock Insider

 XS Financial

( XSHLF - $0.16 )


    XS Financial is a leading provider of equipment leasing services for the U.S. marijuana industry.  Cannabis dispensaries often have difficulty financing their operations.  The product remains illegal at the federal level.  Most banks and large leasing companies tend to avoid the business.  Those that might be willing to lend are put off by the industry's unconventional (all cash) practices, and the perceived risk of non-payment.  XS Financial has obtained approval from banking regulators in the 15 states where it currently operates.  The company works with both medical and recreational retailers and growers.  It emphasizes larger chains with multiple locations.  Those customers tend to be well financed with solid banking relationships.  They also generally have professional operating procedures.  Risk is low as a result.  To date, XS Financial has experienced no missed payments or bad debts.

    Growth is accelerating.  XS Financial started out as an equipment re-seller.  Historical financials presented that equipment value in revenue.  In 2021 the company converted into a straight leasing company.  Equipment passed through from the seller to the end user.  Revenue now includes just interest income and service fees.  XS Financial remains responsible for the equipment in the event it's re-possessed.  That hasn't occurred to date.  If it did, most of the gear isn't marijuana specific -- 85% could be re-marketed to non-cannabis retailers.  And with the U.S. marijuana industry still in the midst of an explosive growth phase, finding alternative cannabis lessees probably wouldn't be difficult.

    Administrative costs are relatively fixed.  XS Financial enjoys a high degree of operating leverage.  As deals are closed recurring revenue (interest income) builds up.  Then more deals are completed and the benefit is repeated.  The company raised $9.9 million in a private equity placement last January at $0.24 a share.  (That transaction included an equal number of warrants exercisable at $.36 a share.)  Managers have been working for stock options until recently.  A $15 million line of credit recently was obtained.  Those baseline funds earn above average rates of return because dispensaries are desperate for money to grow, and there is little direct competition.  Stores normally can obtain real estate funding.  But equipment financing is scarce.

    XS Financial had $19.2 million in receivables as of June 30, 2021.  That's the equipment value, which won't appear in revenue.  Interest income on that amount will be reflected in revenue in upcoming periods.  In the first six months of 2021 the company generated $0.98 million in revenue.  We estimate the full year figure will reach $2.5 million as the portfolio continues to expand.  More than $100 million of equipment is in the pipeline.  Activity keeps accelerating as deal size grows, new states legalize marijuana, and more dispensaries open in states that already are legal.

    Syndication could provide additional earnings leverage.  The company writes standard leases that can be bundled into securities for investors to purchase.  To date $6 million have been sold.  Substantially larger packages are likely in the future.  XS Financial likely will sell the securities at a premium, keeping for itself some of the above-average interest income.  It also will collect agency fees for servicing the payments and staying on top of the customers.

    XS Financial is turning the corner on profitability.  The company broke even in the June quarter.  We estimate that trend will continue through the end of the year.  Our 2022 estimates assume the company retains all the leases it originates.  If it syndicates a portion, income could be higher.  Revenue could attain $10 million to provide (fully taxed) earnings of $.01 a share.  In 2-3 years revenue could reach $25-$50 million.  Earnings could reach $.04-$.08 a share.  Providing a P/E multiple of 20x to the midpoint of the range suggests a target price of $1.20 a share, potential appreciation of 650% from the current quote. 

    The shares are registered in Canada.  Financials are reported in U.S. Dollars.  The stock trades in Canada and over the counter in the U.S.  Limits are advised when placing orders.

    


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