Trader targets Exchange Income Corp.

The long-rumoured short selling campaign against Winnipeg’s Exchange Income Corp. (EIC) shares materialized Wednesday with the release of a 36-page report by noted U.S. short seller Marc Cohodes.

After the release of the report — called Mayday EIF (EIF is the stock-trading abbreviation for Exchange Income Corp.) — EIC’s shares plummeted 8.5 per cent in the largest trading day for the company that went public as an income trust in 2004. As the day went on, the shares rebounded and closed down 4.72 per cent to $31.10.

Short sellers make money when a stock falls in price by selling borrowed shares and replacing them with shares bought at cheaper prices. EIC’s shares have fallen 31 per cent since early December.

The report calls into question EIC’s ability to continue to pay its generous dividend. "Over the last five years, the company has increased its debt load by $427 million and issued over $230 million of shares to fund its $700 million deficit," it states.

Management came out swinging shortly after the Cohodes report hit the wires.

"The short report was deliberately released immediately following the end of the company’s second quarter when EIC is in a quiet period, and is based on a number of statements, assumptions and opinions with which we strenuously disagree," the company statement said.

"EIC has maintained a consistent strategy since its inception in 2004 which has enabled us to grow profitably and return a reliable and growing dividend to our shareholders. Nothing has changed. Since 2004, EIC has paid shareholders $300 million in dividends while maintaining a strong balance sheet with limited leverage."

EIC is a diversified company that acquires profitable businesses in two sectors: aerospace and aviation and manufacturing. In Manitoba, it owns Perimeter Airlines, Calm Air and Keewatin Air. It also owns Newfoundland-based Provincial Aerospace Ltd., which recently won a large contract to provide maintenance and repair services for Canada’s new fleet of search-and-rescue planes, and a Florida-based jet leasing and parts business called Regional One.

Cohodes is the same investor that has made a name for himself short selling other Canadian companies including Valeant Pharmaceuticals and more recently, Home Capital Group.

Cohodes was short selling the Toronto-based alternative mortgage company Home Capital for more than a year. During that time, its stock price has lost close to 70 per cent of its value. It was recently the recipient of a major equity injection by Warren Buffet’s company, Berkshire Hathaway.

Among other claims in the fairly sensationalized report — featuring cartoons and photo-shopped images of EIC executives in crashing planes — Cohodes alleges mismanagement in Perimeter’s widely reported service disruption last winter and potential conflict of interest because the company’s chairman of the board, Gary Filmon, is the father of one of the partners MLT Aikins LLP, David Filmon, whose firm has done a lot of work for EIC. It also claims the head of Regional One spends only a couple of hours per day on the job.

Bay Street equity analysts who cover EIC have been aware of the rumours that such a short report was imminent and most, if not all, have stuck by their generally positive analysis of the company. Their consensus recommendation is a strong buy and many are targeting a price range around $40.

In its corporate news release, EIC said it expects to meet analysts consensus results for 2017 and will accelerate the release of second quarter results from the second week of August to July 24.

In an interview Wednesday afternoon, Trevor Johnson, an analyst with National Bank Financial, said management knew the short report was coming.

He said it was "encouraging" that management was accelerating the release of its second quarter results especially after two previous quarters that were not the company’s best.

"We thought it (the challenging previous results) was temporary and management seemed to think it was temporary so to get a more productive second quarter results in the books would be good," he said.

Johnson said that if the company is able to reaffirm analysts expectations for earnings, "then you will see the short thesis has no teeth."

Cormark Securities published a 49-page research report initiating coverage two weeks ago that addressed the sustainability of the dividend in great detail concluding that it was in good shape.

EIC’s chief executive officer, Mike Pyle, addressed the rumour of the short-selling program in an interview with the Free Press two weeks ago. "At the end of the day, stocks trade on earnings and we are confident in our ability to continue to generate earnings," he said.

martin.cash@freepress.mb.ca

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