Profit from goeasy 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.

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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 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. It has a wide range of financial products both under development and potential products such as credit monitoring, loan protection insurance, auto loans, line of credit, etc.

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 has grown at an impressive rate of 34% CAGR in the last five years. The credit losses that goeasy incurs are reflective of the higher rate of interest it charges. It has an annual net charge-off rate of 10%-15%, since 2012.

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’s strategic partnership with PayBright, a Canadian fintech business has made it a leading provider of non-prime financing offering integrated instant full credit spectrum point-of-sale payment solutions to customers. 

goeasy reduced its operating expenses by $8.9 million at the end of Q3 2020, through lower bad debt expense and prudent management of other general and administrative expenses. Both revenue and loan portfolio grew by 4% and 14% respectively, during the quarter.

The company continues to experience strong credit and payment performance. It enabled digital lending across all channels/customer segments and implemented additional underwriting procedures in select geographies and industry sectors. goeasy is targeting the expansion of its retail, digital and indirect channels through initiatives like growing its easyfinancial locations from 262 to over 300, increasing easyhome lending from 111 to 120 locations, developing a mobile app, completing PayBright eCommerce integration, etc.

Dividends

goeasy is a Canadian Dividend Aristocrat and has been paying dividends consistently for the last 17 years. 2020 marked the seventh 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 1.6% and a low payout ratio of ~30% currently.

The company last raised its dividend by 45% and has maintained an annual dividend CAGR of 29% in the last five years. Its diluted EPS has also grown at more than 23% CAGR since 2001.

With businesses of strong risk-adjusted margins and an average remaining term of lower than four years on loans, goeasy generates significant free cash flow. The company retains ~65% of its earnings to grow the business. 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 second quarter of 2022.

Both its consumer loan and leasing portfolios generate strong cash flows even under unfavorable conditions. goeasy 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 across geographies. goeasy has been successfully increasing its loan book in Quebec which offers significant growth opportunities 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 is well-positioned to become the largest non-prime lender in Canada through product, channel and geographic expansion and M&A opportunities. goeasy has a sound track record of 18 consecutive years of revenue growth and profitability.

The company should benefit from improving consumer demand and declining loan protection insurance claims in the future.

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DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.