Post by
retiredcf on Mar 30, 2023 9:26am
CIBC
EQUITY RESEARCH
March 29, 2023 Earnings Update
GOEASY LTD.
Updating Price Target And Estimates Following Reduction To
The Interest Rate Cap
Our Conclusion
With GSY shares trading 16% below Monday’s close, we feel comfortable
that the impact of a change in the interest rate cap from 47% to 35% is
reasonably priced in. However, we believe that the risk of a further reduction
could remain a key overhang and we have reduced our price target
accordingly. Our 2024 earnings estimate declines by a smaller magnitude
than might be implied by the size of the interest rate cap reduction, but it is
important to remember that the impact will be felt gradually over a multi-year
period and the company has levers available to mitigate the severity of it.
Key Points
Our take on the reduction to the interest rate cap. Yesterday evening the
Federal Government released its 2023 Budget which included a proposal to
reduce the interest rate cap from 47% to 35%. See our initial take here. The
magnitude of the announced change is clearly a negative development but
can be navigated (and mitigated), in our view, by certain product and pricing
adjustments. Overall we expect this event to dampen the earnings outlook,
but acknowledge that the company will continue to produce positive annual
EPS growth for the foreseeable future.
The move from 47% to 35% is now likely priced in. goeasy indicated that
in an illustrative scenario where all existing loans exceeding 35% were
immediately repriced to the new cap, the weighted average interest rate on
the portfolio would decline approximately 2.7%. If we lower the average
interest rate assumption in our model by that magnitude, the earnings impact
would be approximately 20%. However, it is more likely that this change is
applied on a prospective basis (i.e., only affecting new loan originations and
not the back book) and that this impact is felt gradually over a multi-year
period. Furthermore, it does not contemplate any reaction from goeasy,
which, among other things, could entail a repricing of loans below the cap. If,
for example, the company were able to mitigate half the revenue impact by
repricing a portion of the nearly two-thirds of loans that reside below the cap,
the earnings impact could be closer to 10%. With the shares now trading
16% below Monday’s close, we feel comfortable that the impact of a change
in the interest rate cap from 47% to 35% is adequately priced in.
However, the risk of a further reduction remains a key overhang. What
concerns us a bit more is that the Federal Government signalled its intention
to explore a further reduction to the interest rate cap (i.e., beyond 35%) with
no indication of timing or magnitude. We plan to monitor any subsequent
developments on this front very closely as these would inform our rating and
price target on GSY. For now we have lowered our price target from $180 to
$130, reflecting the more restrictive interest rate regime and a lower target
multiple, reflecting caution surrounding the potential for further action.