RBC ElementsTM: Take it (go)easy. Initiating at Outperform
Our View: As one of Canada’s largest non-prime consumer lenders, we like GSY’s strong track record of growth and profitability. We think an investment in GSY offers investors exposure to a part of the Canadian financial services industry that could generate attractive investment returns over the medium to long-term. GSY generated EPS CAGRs of +28% over 10 years, +32% over 5 years and +23% over 3 years, while achieving a 20% or greater ROE in each of the last 7 years. We forecast a 5-year EPS CAGR of 14% with >20% ROE in each year. The shares trade at 9.2x our 2024E EPS forecast, just below its 10-year average of 9.5x. We initiate coverage with an Outperform rating and $193 target.
Key points:
We forecast an EPS CAGR of +14% and >20% ROEs annually over the next 5 years, driven by both a more diverse product offering and omnichannel distribution strategy. The mid-2021 LendCare acquisition added several new product verticals (powersports, healthcare financing, home improvement financing) and ~3,000 new retail merchant relationships, bolstering GSY’s distribution capabilities. In Q3/23, GSY launched its Connect mobile app, which we think can, amongst other things, drive increased cross-sell opportunities.
Strong underwriting track record and lower risk profile. GSY’s net charge- off rate declined from ~14-15% a decade ago to ~10% prior to the mid-2021 LendCare acquisition, which further declined to ~9% today, in part due to increased exposure to both secured loans (41% today vs. 12% pre-LendCare acquisition) and prime borrowers, which were 1/3 of LendCare’s portfolio when it was acquired by GSY. We believe these changes should result in even stronger credit performance going forward.
RBC ElementsTM, our in-house data science team, used unconventional data that allowed us to draw some interesting key takeaways comparing the retail store footprint of not just goeasy, but also its key competitor, Fairstone Financial (see p. 17 to 26). The most interesting key takeaway was that easyfinancial stores were favorably located, as they had significantly higher population density and household density vs. Fairstone (e.g., +39% higher population density and +42% higher household density within a 6- mile radius) and while the median household income was higher, it was not statistically significant).
Initiating coverage at Outperform, $193 target. Our target reflects a 10x P/E multiple (2025E), marginally higher than its 9.5x 10-year average and very slight multiple expansion from the current share price, which we think is justified given our growth outlook in the current macro environment. We think better-than-forecast EPS growth and/or macro concerns subsiding could see a material upward re-rating of the P/E multiple (each 1x change in P/E = ~11% to the share price).