goeasy Ltd T.GSY

Alternate Symbol(s): EHMEF

Financial Services Credit Services

goeasy Ltd. is a Canadian company that provides non-prime leasing and lending services through its easyhome, easyfinancial, and LendCare brands. The Company's segments include easyfinancial and easyhome. The easyfinancial segment lends out capital in the form of unsecured and secured consumer loans to non-prime borrowers. easyfinancial's product offering consists of unsecured and real estate secured instalment loans. The LendCare operating segment specializes in financing consumer purchases in the powersports, automotive, retail, healthcare, and home improvement categories. The easyhome segment provides leasing services for household furniture, appliances and electronics and unsecured lending products to retail consumers. Its customers can transact seamlessly through an omnichannel model that includes online and mobile platforms, over 400 locations across Canada, and point-of-sale financing offered in the retail, powersports, automotive, home improvement, and healthcare verticals.

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Post by retiredcfon Mar 29, 2023 10:09am

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Post# 35366751

TD

Currently have a $180.00 target. Looks like a buying opportunity this morning for long term investors. GLTA

goeasy Ltd.

(GSY-T) C$98.25

Federal Budget Proposes Materially Lower Interest Rate Cap Event

Budget 2023 proposes to lower the 'criminal rate of interest' to an APR (annual percentage rate) of 35% from the current EAR (effective annual rate) of 60% (equivalent to an APR of 47%). Furthermore, the government intends to launch consultations on whether the criminal rate of interest should be further reduced. We will review our estimates as we approach Q1/23 reporting.

Impact: NEGATIVE

Approximately 36% of goeasy's loan portfolio is above the proposed rate cap, with a weighted-average interest rate of ~42.5%. If we reduce the interest rate on those loans to the revised cap of 35% (that is, a 7.5-point reduction on 36% of the portfolio), that would have the effect of reducing our 2023E/2024E EPS by ~25% and lowering the ROE to 18-19% from 25%. We believe this approach is overly punitive for several reasons:

goeasy has been increasing its proportion of secured loans and lowering the average APR of its portfolio for several years, with that trajectory expected to continue (secured: 39.0% Q4/22, 32.8% Q4/21, 12.5% Q4/20; average APR: 30.5% Q4/22, 33.3% Q4/21, 37.8% Q4/20). Put another way, the 36% of the portfolio that is above 35% today would likely be reduced over the course of 2023/2024 and beyond as the business continues to grow, thereby tempering the impact of the rate cap over time, in our view.
The company could re-evaluate pricing on loans that are already under 35%, partially offsetting the lower yield on the impacted book.
The proposed changes are expected to be implemented on a prospective basis (impact would be gradual as portfolio rolls over).
Lower charge-offs should act as a partial offset to the lower yields (the customer should be more capable of servicing the debt).

Bottom-line: the anticipated impact is likely less severe than just looking at gross yield, in our view.

Management emphasized that the impact of this change is manageable (updated/ revised forecasts will be provided in due course). Importantly, they still expect EPS to increase going-forward, however, the rate of growth may moderate in the near-term. The changes will accelerate the company's business plan, rather than fundamentally change it.