deciphering the messI’ve been following this company for years and ripped apart the filings and press releases to understand what’s going on now. My two cents follow:
The bad
Spike in delinquencies in q4 scared the market, related to bad performing dealers who were terminated. Delinquencies were cut dramatically in the following quarters but so were originations all detailed in the filings
Originations drive profit and obviously the market doesn’t think profit is on the horizon due to slowed growth in the previous quarters due to firing of dealers that negatively impacted the business (smart move IMO).
pressure in interest margin
Historical earnings drag from call center
High cost of debt for certain facilities
Leadership changes – never a good thing. Did they dust Hilmer too soon, too late. Doesn’t matter. Most entrepreneurs are not the right people to cross the threshold to maturity of a company and pure growth but growing from zero to over $200 MM in assets in two years is impressive and loss reductions in q3 were likely stimulated by previous leadership. turn the page to strong fiscal leadership by current interim ceo. this company went from nothing to top 3 in the space fast.
Nominal raise likely priced into the stock?
Tax loss selling - brutal
The good
33% drop in operating losses even with nominal origination growth is impressive. Fee margin increased and cost cuts in q3 contributed to some of the loss reduction but more benefit is likely in q4 and future quarters. read the filings
Tons of funding capacity. If funders are on board why aren’t equity investors? One can assume the extensive funding facilities and multiple partners are deep in knowledge of the company fundamentals. Why would they keep funding if the company was garbage?
New sales team focussed on adding dealers which drive originations which drives profit through interest margin and fee’s - very good if they get tractions - q4 originations will be telling, q3 trend is up - they appear to have cleaned up the problems in two quarters
Pressure on interest margin offset by fee income from managing the loan book – combined cash margin is still in tact and strong and on origination growth - even on lower interest margin future fee income will offset interest pressure - cash margin should stay strong
The company retired $7 mm of the high cost debt and must have a plan to retire the rest and if so this will relieve margin pressure and earnings by reducing interest costs - the question is will they retire it with cash or lower cost facilities. maybe both.
The company wrote off dealer relationships which reduces amortization per the conference call by 1+ mm per year making eps more achievable sooner – with cost cuts and reduced losses on call center and higher ebitda on mobile business, the company is well positioned for break even or positive operating income in the coming quarters
Technology platform is mature and scalable which is key to attracting new dealers and originations
Board is seasoned and heavily invested led by Small – I don’t see this board letting this ship sink. They are too strong and too well connected and savvy.
This company has turned a significant corner. At 1.8 mm losses q3 (down from 3.1 q2) plus the earnings pickup touted on the call of a further 1.0 to 1.3 mm quarterly, including reduced amortization, it would appear that q4 or q1 could be operating income even or positive excluding non cash costs. This is the result institutions look for. They will want to see two to three quarters of this positive trend. Zeroing in on eps is critical and the trajectory is there.
The value of the assets is way higher than the market cap. The mobile business at 3-5 x ebitda is worth 20 mm maybe more. The value of the loan book is much higher than that. The call center has been written off in q3 so if they sell it they book a gain. If they sell mobile they generate cash and book a gain leaving a pure play finance business in place that is growing. What’s wrong with this story?
To me this all adds up to .25-.35 per share once the tax loss selling is done and excluding future growth. Any raise ‘must’ be priced into the share price by now? - .09 is disasterously low and oversold isn't it? It would appear to be a very large discount to it’s real break up value? The stock has defied logic even on good news over the past quarters (systematic selling on good news from day 1) so it’s anyone’s guess where this goes but to me there are some very sound fundamentals and it’s a matter of the company making sure investors understand those and staying focussed now on originations and cost containment.