If you are willing to take more risk, you’ll beat the banks

goeasy Ltd. is a leading leasing and lending company in Canada. The company offers both non-prime leasing and lending services through its easyhome and easyfinancial segments.

easyhome (~21% of revenues) is Canada’s largest lease-to-own company. easyfinancial (~89%) is goeasy’s financial services arm that provides installment loans to non-prime customers having limited access to traditional bank financing products.

As a leading full-service provider of goods and alternative financial services, goeasy operates through online and mobile channels, as well as over 400 leasing and lending locations across Canada from coast-to-coast. The company has served over 1 million Canadians and originated over $4.4 billion in loans.

Investment Data

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Revenue Growth & Market Exposure

With nearly three decades of existence, goeasy has built a wide portfolio of financial products and services including unsecured and secured installment loans. Its easyhome and easyfinancial divisions act as seamless platforms for customers offering an omnichannel model. These credit models are built using machine learning and advanced analytical tools.

The company maintains good customer relationships with 1 in 3 customers graduating to prime credit and 60% increasing their credit score within 12 months of borrowing from the company. Sticky customer relationships provide a better predictive behavioral scoring model to the company. goeasy added over 33,000 new borrowers to the easyfinancial portfolio in the last year.

2019 marked the 18th consecutive year of revenue growth for goeasy. The company has a good track record of increasing its revenue in the last two decades and sports a revenue CAGR of 13%. Its interest rates start at 19.99%, with repayment terms of 9 to 60 months for unsecured loans and up to 10 years for secured loans for easyfinancial loans.

goeasy caters to a large base of 9.4 million non-prime Canadians who are unable to access credit from banks and other traditional financial institutions. The company’s loan portfolio stood at $1.1 billion at the end of FY 2019, increasing by 33% from 2018. The credit losses that goeasy incurs are reflective of the higher rate of interest it charges. In 2019, it experienced an annual net charge-off rate of 13.3%, measured on the outstanding loan balance at the end of each month.

The size of the Canadian market for non-prime consumer lending is approximately $231 billion. goeasy continues to increase the distribution footprint of its financial services products and leverage its existing real estate expertise to grow its customer base.

The company invested in PayBright, a Canadian fintech business focusing on instant point-of-sale consumer financing having partnerships with over 6,000 domestic and international merchants and became the provider of non-prime financing within their platform offering Canada’s leading instant point-of-sale payment solution to customers.

Q2 revenues increased by 2% YoY, but was partially impacted by lower commissions on ancillary products. Credit losses also improved and the net charge-off rate for the second quarter was a record low at 10%. Customer payment performance and cash flows registered an increase. goeasy expects loan portfolio growth by ~3% to 5% in the third quarter and to improve further.

Dividends

goeasy is a Canadian Dividend Aristocrat and has been paying dividends consistently for the last 16 years. 2019 marked the sixth consecutive year of an increase in the dividend to shareholders.

It has a dividend objective of paying 35% of prior year earnings. goeasy sports an annual dividend yield of 2.9% and a low payout ratio of ~34% currently. The company last raised its dividend by 45% and has maintained an annual dividend CAGR of 29% in the last five years.The company has returned $20.3 million to its shareholders in share repurchases during the last year.

With businesses of strong risk-adjusted margins and average remaining term of lower than four years on loans, goeasy generates significant free cash flow. Most of its free capital is directed towards growing the loan portfolio. goeasy charges its customers interest on the money it lends and also receives a commission for the optional ancillary products it offers through third party providers. goeasy has a well-capitalized balance sheet.

It has enough cash and borrowing capacity to fund growth through to the fourth quarter of 2022. The company acts as a better alternative to the expensive and inflexible payday loans. It has a disciplined approach to managing risk and has demonstrated a history of stable and consistent credit performance.

With an aim to reduce the cost of borrowing for customers, increasing the average loan size, and extending customer tenure, goeasy has become a preferred choice for non-prime borrowers.

The company continues to invest in expanding its financial services product range, broadening its channels of distribution, and expanding the geographies. goeasy has successfully doubled its loan book to $75 million (~7% of total portfolio) in Quebec in the last year. The state offers significant growth opportunities for goeasy, with 22% of the Canadian population living here.

Competition

Fairstone, formerly CitiFinancial Canada, is goeasy’s largest competitor. The company also faces competition from numerous pure-play online lenders and large payday loan chains including MoneyMart and CashMoney.

The risk of default is higher in the case of new online customers than from retail customers. Moreover, there are chances of higher losses from the first loan issued to a new customer than every subsequent loan. Despite the shift in the mix of originations, goeasy maintains a stable loss rate.

Bottom Line

goeasy stands a good chance to benefit in the current scenario when prime lenders, including major banks, tighten credit criteria in response to the weaker economic environment, limiting credit access for near-prime consumers. The company remains well positioned to navigate through the current economic downturn as conditions gradually improve and consumer demand for credit begins to rebuild.

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