Teranet builds on its Ontario monopoly

TERANET INCOME FUND $9.50 (Toronto symbol TF.UN; Aggressive Growth Portfolio, Manufacturing & Industry sector; Units outstanding: 155.0 million; Market cap: $1.5 billion; SI Rating: Speculative) manages Ontario’s electronic land registration system.

Over 80,000 customers use its proprietary, software application, Teraview, to conduct electronic real estate registrations as well as title and writ searches. Teranet has an exclusive license from the Ontario government to operate the land registry system until March 31, 2017.

Teranet’s units began trading on June 16, 2006 after the fund completed an initial public offering at $10.00 a unit. The fund pays distributions of $0.065 a month. The annual rate of $0.78 yields 8.2%. Teranet distributed 70% of its cash flow to unitholders in 2007.

Electronic conversion nearly complete

Teranet continues to automate and convert Ontario’s land information base from paper form. This represents 94.1% of the provincial information base, up from 90.3% a year earlier. The base also continues to grow at no cost to Teranet, as new commercial and residential buildings are constructed and electronically registered.

In 2007, Teranet earned $0.88 a unit (total $136.6 million), on revenue of $253.7 million. Cash flow in 2007 was $1.08 a unit. In the period from June 16, 2006 to December 31, 2006, Teranet earned $0.31 a unit ($47.9 million) on revenue of $134.5 million.

Land registration and search fees supply roughly 90% of Teranet’s revenue. Revenues are generally lowest in the first quarter, improve in the second and third quarters as real estate and other activities increase and then drop somewhat in the fourth quarter.

Other products look promising

The remaining 10% of Teranet’s revenue comes from other non-land registry products and services. For example, its REDX fraud prevention software helps financial institutions and other lenders lower the risks associated with mortgage and real estate transactions. Teranet is also helping 33 Ontario hospitals to automate their patient records. This will make it easier for them to share information, and cut down on medical errors.

Teranet continues to diversify. It recently paid an undisclosed sum for Do Process Software Ltd., whose products help real estate lawyers prepare and manage complex mortgage documents and other files. Do Process has over 2,300 clients across Canada, so the purchase also cuts Teranet’s reliance on Ontario.

Monopoly gives Teranet a head start

Teranet’s guaranteed monopoly cuts its risk and provides steady cash flow for now. However, the fund’s growing customer base should help protect it from new competitors when its license expires. As well, customers used to Teranet’s products will be reluctant to switch to an unfamiliar information provider.

Teranet Income Fund is a buy.

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