Post by
retiredcf on Nov 22, 2022 9:50am
CIBC
Have a $180.00 target. GLTA
EQUITY RESEARCH
November 21, 2022 Earnings Update
GOEASY LTD.
Unlocking Additional Balance Sheet Capacity
Our Conclusion
We are resuming coverage of goeasy following a period of research
restriction related to a $58 million equity raise. The issuance was completed for the purpose of unlocking additional debt capacity to help fund future loan growth (which has experienced an accelerated trajectory this year). Above- plan growth is a good problem to have, in our view, particularly when it is accompanied by stable credit performance. We believe that the equity raise should signal a strong outlook for loan growth from management in what is typically a seasonally stronger period (i.e., Q4).
Key Points
Equity issuance completed with full exercise of over-allotment option.
goeasy has closed a $58 million equity raise at a price of $118.50, reflecting an implied P/E multiple of 8.7x based on the NTM consensus estimate. The over-allotment option was exercised in full.
Unlocking balance sheet capacity. The purpose of the equity raise
appears relatively straightforward. goeasy has sufficient debt capacity
available to continue funding future growth through the second half of 2025 (as announced with the release of Q3 results approximately 11 days ago). However, accessing that debt capacity is also controlled by certain
covenants imposed by the banks. Management felt that they were running a bit close to the bank covenants, and that a very modest equity raise would balance out the capital structure appropriately and enable the company to continue participating in the accelerated growth of its markets. For context, gross proceeds of the equity issuance amounted to only ~3% of the company’s market capitalization.
Positive read-throughs on the growth trajectory? The equity raise
enables goeasy to continue pursuing an elevated rate of growth. At the
outset of the year, the company was guiding to year-end loan balances of
$2.4 billion to $2.6 billion, and subsequently achieved the high end of that
range by Q3. Loan growth guidance was revised upward in August, and the company beat its quarterly guidance pretty solidly in Q3. Clearly, the
company is experiencing loan growth that has exceeded its own internal
expectations, and has consequently outpaced its ability to generate capital internally (a good problem to have, in our view, particularly considering that the growth has been accompanied by stable credit performance to date). We suspect that the equity raise would not have been completed if the company had not become increasingly comfortable in its ability to achieve or exceed the high end of the guidance range for loan growth going forward.
Revising our estimates slightly. We are updating our estimates to reflect
the equity raise. Our 2023 EPS estimate declines 3% simply reflecting an
increased share count.