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GSY - GoEasy


valueinvestor
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It's seem most of you understand the business.

 

It's a subprime lender with a proprietary algorithm that helps find potential borrowers for their program. With the age of zero-interest rate, I find that they have a huge tailwind, and it's one of those companies that haven't really recovered to their normal highs from the Massacre of March 18, 2020.

 

I have been doing some empirical research and talking to prior customers - so far they have been happy. Although the rates can be considered usurious, a lot of the customers were happy for the service, because they have the cash but unfortunately due to their lack of credit or circumstance they are not qualified for a traditional loan. However once they get lending, there are a few benefits that make them happy:

 

1) They build back their credit.

2) Once paid back - they qualify for better loans.

 

This is not without hair obviously, but assuming a net charge off in the 15-20% range and the growth they will experience by finding new borrowers through their algorithm, and the fact they were able to scale so quickly, I feel like the entry point is quite compelling.

 

This can be a multi-bagger in one year or downside can be protected as most of these loans are structured in a way, where they get daily to weekly payouts and the interest rates are quite high - so any bank would most likely love to acquire this book of business if management will allow them.

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The issue with Goeasy has always been the risk of government regulating the company out of business. A lot of consumer advocates argue Goeasy's 45%+ loan (plus other fees that almost always get tacked on) isn't much better than the traditional alternative, payday loans.

 

I also think there's zero chance the company gets acquired by a Canadian bank. If the banks wanted a piece of this market, they would have entered it a long time ago.

 

Saying all that, however, the stock is compelling on valuation, growth potential, and obvious competitive advantages alone. Goeasy basically owns its market, and has potential to move into more prime areas. And I bet business will boom over the next few months, too. Defaults will likely be an issue, but should be manageable if the economy bounces back quickly.

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The issue with Goeasy has always been the risk of government regulating the company out of business. A lot of consumer advocates argue Goeasy's 45%+ loan (plus other fees that almost always get tacked on) isn't much better than the traditional alternative, payday loans.

 

I also think there's zero chance the company gets acquired by a Canadian bank. If the banks wanted a piece of this market, they would have entered it a long time ago.

 

Saying all that, however, the stock is compelling on valuation, growth potential, and obvious competitive advantages alone. Goeasy basically owns its market, and has potential to move into more prime areas. And I bet business will boom over the next few months, too. Defaults will likely be an issue, but should be manageable if the economy bounces back quickly.

 

Just a counterpoint.

 

Banks already are getting into the business with ThinkingCapital - so I do think there's a chance at the right price.

 

Secondly GoEasy is a better alternative to payday loans. I'm under the impression that the average payday loans charge $100 for every $500 and the loan must be paid back in 14 days. So that's 20% in interest in just 14 days. As opposed to GoEasy where there loans are on average 43.5% loans paid back over a year.

 

 

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  • 2 weeks later...

alright valueinvestor, I got mad at the bro in SHOP thread making fun of SHOP shareholders, but I woke up cranky today so let's talk about GoEasy (which by the way is the most scarily named financial since failed Indian corporate lender Yes Bank). It turns out Yes should have said No a bit more often.

 

I can think of no scarier business to own right now than a Canadian subprime lender that depends on getting an average 50% effective interest rate (with fees, based on investor presentation, am i reading that right?) to make a 25% ROE, that has quadrupled its assets over the past 5 years.

 

holy hell man, between this and SHOP at 50x sales, what's in your "lower risk" bucket?

 

The way I see it, there are 3 paths:

 

1. Like most over-earning financials, competition suppresses the asset yield to the point where ROE becomes more pedestrian and/or GSY is unable to keep feeding the beast. For a case study in this, I'd liken it to Bank OZK which grew like crazy making construction loans that were at low LTV and had a high credit spreads that more than compensated for the low risk taken and they earned a very nice NIM, then the debt funds poured in and took out their niche and originations in their core biz slowed down (their ROE dropped because of inability to grow the good loan book, had to move into RV lending and just slow down growth), stock at $16 versus the $40's 5 years ago, 0.6x book. regulatory risk mentioned above seem extremely likely. I am confused why our liberal neighbors to the north allow 50% lenders to exist, particularly as the entire country loses their job. The great white short (after a positively australian like levitating act) is finally looking like a pretty good trade with its over levered consumers, extremely expensive housing market and fat and happy financial sector.

 

2. credit issues in the book cause real impairment and then you own a financial at 160% of tangible book? is that right? $520mm / $300mm? for a subprime canadian lender when canada is about to get hammerfucked by a global recession and oil depression?

 

3. they do better than my superficial top-down view suggests and earn an outsized ROE for longer than expected, stock does very well. If you can earn a 25% ROE for 10 years and then make an ROE that is closer to the required rate of return (such that you are worth book value instead of a premium), what value would that lead to in a residual income model? I am temporarily without excel (long story) but I imagine its 3-4x book so stock would have 100%+ upside on a re-rate and compound nicely.

 

do you agree with the 3 scenarios, what probability would you assign to each?

 

why is this a good risk/reward?

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alright valueinvestor, I got mad at the bro in SHOP thread making fun of SHOP shareholders, but I woke up cranky today so let's talk about GoEasy (which by the way is the most scarily named financial since failed Indian corporate lender Yes Bank). It turns out Yes should have said No a bit more often.

 

I can think of no scarier business to own right now than a Canadian subprime lender that depends on getting an average 50% effective interest rate (with fees, based on investor presentation, am i reading that right?) to make a 25% ROE, that has quadrupled its assets over the past 5 years.

 

holy hell man, between this and SHOP at 50x sales, what's in your "lower risk" bucket?

 

The way I see it, there are 3 paths:

 

1. Like most over-earning financials, competition suppresses the asset yield to the point where ROE becomes more pedestrian and/or GSY is unable to keep feeding the beast. For a case study in this, I'd liken it to Bank OZK which grew like crazy making construction loans that were at low LTV and had a high credit spreads that more than compensated for the low risk taken and they earned a very nice NIM, then the debt funds poured in and took out their niche and originations in their core biz slowed down (their ROE dropped because of inability to grow the good loan book, had to move into RV lending and just slow down growth), stock at $16 versus the $40's 5 years ago, 0.6x book. regulatory risk mentioned above seem extremely likely. I am confused why our liberal neighbors to the north allow 50% lenders to exist, particularly as the entire country loses their job. The great white short (after a positively australian like levitating act) is finally looking like a pretty good trade with its over levered consumers, extremely expensive housing market and fat and happy financial sector.

 

2. credit issues in the book cause real impairment and then you own a financial at 160% of tangible book? is that right? $520mm / $300mm? for a subprime canadian lender when canada is about to get hammerfucked by a global recession and oil depression?

 

3. they do better than my superficial top-down view suggests and earn an outsized ROE for longer than expected, stock does very well. If you can earn a 25% ROE for 10 years and then make an ROE that is closer to the required rate of return (such that you are worth book value instead of a premium), what value would that lead to in a residual income model? I am temporarily without excel (long story) but I imagine its 3-4x book so stock would have 100%+ upside on a re-rate and compound nicely.

 

do you agree with the 3 scenarios, what probability would you assign to each?

 

why is this a good risk/reward?

 

Hey, dissenting views are welcomed! :D

 

1. I don't think I mentioned it was low risk (my low risk are not worth mentioning, but if you want to know it's BIP.TO, CPX.TO, CN). It's definitely scary to own and most of their book of business can be trash. However, looking at their performance during the 2015 Alberta Oil Crash and other alternative lenders during times of crisis, it's not as scary. It's counterintuitive but the delinquency rates seem to be resilient at 15%. I guess that's when you can say I've decided to invest irrespective of the economic background, it could be like HCG where they go down by 80% in a year, but again I could always buy more because I do not think business is permanently impaired.

 

Also for them to break even, apparently their net charge off rate has to increase by 85%, so that provides a nice cushion. As for liquidity, they've drawn down on their credit lines and issued $550M in debentures recently. Most of their loans are insured, therefore in the case of unemployment, borrowers are covered for 6 months and if they are still unemployed they get a lump sum of $2K.

 

2. For the past decade, Parliament tried to pass a bill but hasn't to date. It's important to remember GoEasy is the in-between before the payday lenders and chartered banks. Most people don't realize this but chartered banks are in bed with alternative lending firms via partnerships with referrals and deep lending-borrow relationships. However, if the bill does pass, the cap is 45%, and most of the GoEasy loans are under 45%.

 

I would say the odds are the economy will tank, but it doesn't really matter, as GoEasy will survive this - and you never know with all this stimulus money.

 

EDIT: With the stimulus comment, I meant that economy can get worse but stock market will still be up. It’s almost a certainty that google and facebook’s revenues are impaired this year by 10%+, but I don’t think it’s not unfathomable to see their stocks go up by earnings because it was already expected and imho there’s always seem to be a lag time between economic and stock market results.

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In 2015, GSY was 1/4 of their size today, right? Might this time be different?

 

Per their presentation they've CAGR'D loans at 40% since 2015, and their yield has declined from 64% to 50% (I literally can't fathom these numbers; I don't spend a lot of time on seedy financials, but how on earth can a cohort of borrowers* who need to borrow at an effective 50% top out at 15% delinquency? That just seems implausible.  how do you grow 40% without taking on worse risk?

 

So might their downturn experience be worse with a portfolio that's 4x as big and yielding 25% less?

 

*speaking of that cohort: I find slide 27 the scariest of all (I need to find a new word)

40 year olds who have 1.5 kids who make $47K CAD / year, 80% of whom don't own their house (which is the only reason they have less debt than the average canadian, i kind of find that stat very salesy), 73% of whom "save a little or nothing at all".

 

I just don't get why a balance sheet subprime lender trades at 1.6x book in this environment. I don't know the space well, but for example of sentiment, NICK is a secured (auto) subprime lender at 40% of book. that seems to price in some problems.

 

1.6x for a lender that's growing like crazy and charging these rates to these types of customers in Canada!

 

Since I don't have the stones to short it, I'll shut up now. But color me confused.

 

 

 

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How do you grow 40% without taking on worse risk?

 

 

Just because they are growing 40% a year, it does not necessarily mean they are underwriting bad loans.

 

I agree with you, it seems implausible firsthand, but if you take a look at their sales funnel - meaning how they campaign, prospect, generate leads and close on the right leads, as well as compare it with other sales funnels from subprime/prime lenders, it makes sense to me why they are growing as fast as they are now. You can start by looking at their ads on Facebook and Google, and actually experience the process by signing up and seeing how the entire process worked - short of actually getting the loan. That's what I did, and it's amazing how you can essentially get funding without ever stepping out of your house.

 

However, as you correctly point out 9.99/10 times when a subprime lender is growing 40%+/year, it is because they are writing bad loans. Ever since 2008 with the housing crisis and the malarkey that went on with the AAA ratings given by credit agencies, I am also skeptical of subprime lenders with seedy financials.

 

All I can say is if you take a look at their sales funnel, and compare it with other companies, you will see GoEasy years ahead of their competitors. With that, I think it's unfair at this point to clump them with other subprime lenders unless the efficiency of their underwriting process is the complete opposite of their sales funnel.

 

If there any other point you wanted me to address, feel free to let me know, I just addressed the one above, as it seemed the most salient and the answer provided would've most likely addressed your other minute points.

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Wouldn't this be an awful business to buy now since subprime loans will certainly be impaired?

 

Valdagger - I hope you'll forgive me :-[ - for some reason I have missed your post entirely, it was not intentional.

 

Appreciate the feedback; I’ll just watch this one for now; no need to address anything.

 

It's my pleasure, thank you for your input - it was also appreciated! :D

 

 

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  • 2 weeks later...

goeasy Ltd. Reports Results for the First Quarter

Loan Portfolio of $1.17 billion, up 33%

Revenue of $167 million, up 20%

Diluted Earnings per Share of $1.41, up 20%

Total Liquidity of $214 million

 

easyfinancial

• Total application volume increased 12%

• Revenue grew to $132 million, up 26%

• Secured loan portfolio grew to $122 million, up 78%

• 59% of net loan advances in the quarter were issued to new customers, down from 63%

• 46% of applications acquired online, up from 43%

• Aided brand awareness of 83%, up from 82%

• Average loan book per branch improved to $3.8 million, an increase of 22%

• The delinquency rate on the final Saturday of the quarter was 5.4%, up from 4.3%

• Operating income of $51.4 million, up 25%

• Operating margin of 39.1%, flat to 39.5%

 

easyhome

• Revenue of $35.4 million, up 0.5%

• Same store revenue growth of 4.5%

• Consumer lending portfolio within easyhome stores increased to $40.7 million, up 67%

• Revenue from consumer lending increased to $5.5 million, up 64%

• Operating income of $7 million, down 2%

• Operating margin of 19.8%, slightly down from the 20.3% reported in the first quarter of 2019

Overall

• 40th consecutive quarter of same store sales growth

• 75th consecutive quarter of positive net income

• 16th consecutive year of paying dividends and 6th consecutive year of dividend increases

• Total same store revenue growth of 19.6%

• Return on equity of 26% in the quarter, up from 24%

• Fully drawn weighted average cost of borrowing reduced to 5.4%, down from 6.8%

• Net external debt to net capitalization of 72% as at March 31, 2020, in line with the Company’s

target leverage ratio of 70%

• Repurchased 204,150 common shares at a weighted average price of $48.98 through the

Company’s Normal Course Issuer Bid

• No reduction of personnel during COVID-19

 

https://goeasyltd.gcs-web.com/financial-information

 

Not a bad quarter considering.

 

 

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I'm reminded a lot of a company down south in the states called OneMain Financial (OMF), subprime lender that was profitable through '08-'09 recession, as in their words, subprime borrowers are always down on their luck. OMF saw charge offs grow from 6.6% to 10.4% in their '06 cohort vs '08 loan cohort. Just hope you have the same confidence in the management team / underwriting if charge-offs grow a similar amount. 

 

See http://investor.onemainfinancial.com/Cache/IRCache/2e5fe00c-7211-989b-d4a5-f5e0cc764731.PDF?O=PDF&T=&Y=&D=&FID=2e5fe00c-7211-989b-d4a5-f5e0cc764731&iid=4405478

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I'm reminded a lot of a company down south in the states called OneMain Financial (OMF), subprime lender that was profitable through '08-'09 recession, as in their words, subprime borrowers are always down on their luck. OMF saw charge offs grow from 6.6% to 10.4% in their '06 cohort vs '08 loan cohort. Just hope you have the same confidence in the management team / underwriting if charge-offs grow a similar amount. 

 

See http://investor.onemainfinancial.com/Cache/IRCache/2e5fe00c-7211-989b-d4a5-f5e0cc764731.PDF?O=PDF&T=&Y=&D=&FID=2e5fe00c-7211-989b-d4a5-f5e0cc764731&iid=4405478

 

We’ll see. A major part of the thesis is their underwriting standards and loan profile is able to withstand COVID-underwriting

So far what I’m assuming, even with a 15% net charge off rate, they are still ahead. When I got in - it was about 5-6x earnings, so it was hard for things to go wrong unless their underwriting was absolute dog sh*t. Either way, they are still able to find new borrowers with their targeted data-driven approach.

 

If the portfolio is in run-off, they would be able to clear the debt in 20 months alone.

 

So it has hairs but so far it has rewarded me.

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  • 3 months later...

The notion that the worst of the Covid shutdowns is behind us seems very odd to me.

Free government money has propped up payrolls and personal coffers. When the wage subsidy rules change and individuals are transferred over to the regular EI system, how will consumer credit in Canada hold up?

 

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A valid top-down view.

 

From the bottom-up, I would again refer to their sales funnel, and how they target borrowers, it's hard to believe they are underwriting bad loans, in my opinion. Of course, there's a level of trust that needs to be placed on management, as this could change on a dime.

 

Secondly, the market is not reflecting the minority interest of their PayBright business, or again has a top-down view.

 

I don't think consumer credit is going away with COVID, it may increase, and my thoughts are GoEasy is structured in a way that they can capitalize, especially when competitors falter. 

 

To be fair, I wouldn't have invested at these prices, but when I came in - it was around 5-6x pre-covid earnings and the narrative was they couldn't survive a COVID apocalypse.

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  • 2 months later...

Loan Portfolio of $1.18 billion, up 14%

Net Charge-Off Rate of 7.8%, down 540 bps

Adjusted Diluted Earnings per Share of $2.00, up 56%

Total Liquidity of $250 million, up 16%

Revenues Up Mid-Single Digits

 

Not sure if GoEasy was easy investment or lucky, but investors still underestimating PayBright equity investment.

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