In a separate note, National Bank's Gloyn said Goeasy Ltd.’s $58-million equity bought deal “builds balance sheet capacity to fund future growth and also improves the leverage profile of the company.”
Upon resuming coverage of the Mississauga-based alternative financial services company, he said the equity raise is likely to be accretive in the second half of 2023, falling in line with management’s view, and touted its “rapid growth profile.”
“Management expects gross consumer loans receivable growth to track closer to more than $750-million in 2022 and exceed the high end of guidance in 2023 and 2024,” said Mr. Gloyn. “The $58-million incremental equity is expected to unlock $350-million to $400-million of growth capacity. As a result, we expect management to increase 2023 and 2024 guidance with Q4-22 results to be released in February 2022. The transaction is expected to be accretive in H2 2023 as the growth in the loan book generates enough earnings to offset the share dilution (despite the continued shift towards lower yield securitized loans such as HELOCs and auto loans).”
He also thinks Goeasy’s leverage metrics and balance sheet “remain solid,” adding: “Crucially, the decision to improve the leverage profile of the business was made internally. The company lowers its net debt to tangible net worth ratio, which stood at 4.38 times in Q3-22 vs. the covenant of less than 4.50 times, to a more comfortable level in the ‘low 4s. ‘Importantly, we estimate the net debt to tangible net worth ratio will remain roughly flat near term as internal capital generation through earnings offsets higher debt funded growth. Management boasts $1.12 billion in total funding capacity, including cash and recently upsized securitization facilities, sufficient to fund growth through H2-2025.”
Narrowly lowering his adjusted diluted earnings per share for 2022 ($11.27 from $11.31), Mr. Gloyn raised his expectations for 2023 and 2024 (to $14.87 and $18.67, respectively, from $14.70 and $18.31). That led him to raise his target for Goeasy shares to $175 from $170 with an “outperform” rating. The average on the Street is $199.11.
“Our $175 price target (was $170) implies a 10 times target P/E multiple (unchanged) on our NTM [next 12-month] adj. EPS+1YR estimates,” said Mr. Gloyn. “Our target multiple aligns with the five-year average trading multiple of 10 times, which we believe appropriately balances the company’s solid execution against persistent macroeconomic headwinds. GSY is trading at 8 times consensus NTM EPS estimates, slightly below the long-term average trading multiple (compared to ex-COVID low of 6.3 times in 2016 and recent peak of 17 times). We continue to expect GSY will successfully execute on its three-year guidance including i) demonstrating stable credit performance, and ii) executing on several loan growth initiatives (e.g., product, channel, geographic).”
Elsewhere, others resuming coverage include:
* Scotia’s Phil Hardie with a $165 target, up from $164, with a “sector perform” rating.
“The financing came as a bit of a surprise; however, we view it as a strong signal from management that it intends to continue to sustain strong loan growth momentum through 2023 and 2024 and is confident that it will meet or exceed its current targets despite a transitioning economy,” said Mr. Hardie. “We estimate the equity injection will add an additional $350-million to $400-million of loan growth capacity without compromising the company’s financial strength and keep its leverage ratios well within the targeted range. The offerings were met with strong investor demand, despite lingering macro uncertainties and a difficult capital markets environment with equity financings on the Toronto Stock Exchange likely to hit multi-decade lows in 2022 ... GSY shares trade at a relative premium to peers, but we believe its valuation continues to look interesting, though it’s not in value territory. Reduced risk to the economic outlook and a broader shift in investor sentiment and risk appetite are likely needed for the stock to sustain a rebound.”
Elsewhere, Desjardins Securities’ Gary Ho resumed coverage with an unchanged “buy” rating and $185 target.
“The $58-million equity issue helps unlock $350-million in liquidity to support accelerated growth without jeopardizing its current credit rating/covenant metrics,” said Mr. Ho. “Alternatively, management could maintain its steady-state growth outlook (ie within its three-year commercial targets) and not raise equity capital/compromise leverage. This would result in GSY deliberately slowing growth, allowing earnings to build into equity/capital over time. We remain confident that management can hit its credit guidance near-term. GSY expects the transaction to be accretive by 2H23. By its estimate, earnings from C$7580-million incremental loan book growth would neutralize the dilution.
“Our investment thesis is predicated on: (1) GSY’s ability to manage in the current challenging macro environment through its robust credit underwriting platform, supplemented by its creditor insurance program; (2) solid loan book growth, particularly on secured products (powersports, auto, home equity LOC); (3) credible management team; and (4) the business has consistently generated a mid-20-per-cent ROE.”