Shifting demographics across Canada - specifically around transportation - could lead to a growing investment opportunity.
A vehicle is a must-have for the majority of Canadians. According to the 2016 census, roughly 74% of people drove to work. That is up from 69% from the 2011 survey. With household debt being at historical highs, the major banks tighten their lending criteria and the rising cost of living forces people to live farther from their place of work. Those two factors combined, drive the need for non-standard financing solutions in the auto sector. One Company is aiming to “kill two birds with one stone” as it expands across the country to meet this growing need while offering Canadians a means to get back on track, financially.
Axis Auto Finance Inc. (TSX :V.AXIS, Forum) is a public Company that provides non-standard financing options targeting the roughly 30% of Canadians who do not qualify for traditional bank-type loans to purchase a used vehicle. After several acquisitions and rapid organic growth, the Company is the largest publicly traded non-prime auto lender in a country where 2.9 million used cars are sold annually.
Looking at the used car market size, it reads more like something from the cannabis sector – an estimated $40 billion market and $8 billion of that comes from non-prime used vehicle financing.
Company Founder and President, Ilja Troitschanski recently sat down with Stockhouse Editorial to talk about the business’ future, but also where it came from. Axis was born out of two realizations:
- There weren’t players in the field who had sufficient access to capital, management discipline and a long-term vision to become a leader in the fragmented Canadian market
- Market share was there for the taking if Axis used advanced strategies and technology to disrupt the very traditional auto lending market
Axis came from humble beginnings, six employees sharing a windowless office at a used car dealership. But it expanded quickly, posting growth rates over 100% a year. Management took Axis public in 2016 with the view of securing faster access to equity capital and using stock as currency toward acquisitions. By the end of 2017, the portfolio grew organically to ~$22M and Axis started to execute on its growth-by-acquisition strategy.
The non-prime auto finance space is highly fragmented. This has created an opportunity for Axis to implement a roll-up strategy to quickly scale up and build a platform to dominate the industry by leveraging economies of scale, operational efficiencies and cheaper funding. In the first half of 2018, the Company acquired two competitors: Cars on Credit Financial and Trend Financial Corp.
These two acquisitions were similar, yet brought different advantages to the table. The first one, Cars on Credit, was bought for $11 million and more than doubled the Axis portfolio to ~$55 million, while giving Axis two key tools to its expanse: Entry into the Maritime market and a loan product to supplement its existing lease product.
Trend, a direct competitor, was acquired for $23.9 million which, again, doubled the Axis portfolio from $55 million to roughly $110 million. This move not only eliminated its largest competitor, but, in conjunction with Cars on Credit, gave Axis a commanding competitive position in the Ontario market.
“If you look at the Ontario subprime auto market, Axis and Trend were like Coke and Pepsi. Head-to-head competitors fighting every day for business from the same dealers. Dealers frequently used this to get better terms - that’s no longer the case.”
Within 12 months, the Company plans to have a national footprint employing a combination of organic growth and additional acquisitions.
Axis is eyeing an expanse into Western Canada, which is a non-prime market that has been recovering since the oil price shock of 2014. The plan is to gain entry through organic growth.
The other big target is Québec, Canada’s second most populated province. Given that the legal framework is different in Québec, growth there will likely be accomplished through a platform acquisition.
A powerful supplement to this growth strategy could be portfolio purchases. Ilja Troitschanski has seen a number of companies in the non-prime auto market that enter the market attracted by high yields, but quickly lose access to capital and are forced to sell their portfolios. These situations present a potential opportunity: Axis has a highly scalable infrastructure that can absorb portfolios and drive better unit economics as part of a larger structure. If purchased at the right price, these portfolios can significantly accelerate revenue growth.
Recently joining the Company as CEO is Todd Hudson, one of the founders of Element Financial (TSX: EFN) and ECN Capital (TSX: ECN). His pedigree boasts 25 years of experience in operations, M&A and sales, having overseen 14 separate acquisitions throughout his career. Todd’s vision is to grow Axis into a clear Canadian sub-prime market leader with a national footprint and cheaper bank funding, similar to what Carfinco Financial Group has been before it was taken out by a bank. Having done this before at Element, it seems to be a very realistic goal.
A recent report by PI Financial compared Carfinco to Axis post the acquisition of Trend and Cars on Credit:
“After these two acquisitions are digested, we expect Axis to further roll-up the non-prime auto finance field. Now that Axis has a dominant position in the GTA, an acquisition out west would make sense.”
Non-prime lending carries inherent risks that need to be properly assessed and priced. These risks are also the reason why banks shy away from this market. Axis uses sophisticated algorithms, developed in-house, to judge the risk of every individual customer and customize the underwriting to both the vehicle and borrower. Axis does a deep-dive into the borrower’s credit situation going far beyond the credit score, which is not considered a very important indicator for risk.
Looking into the credit details, trade lines and the history of issues, its predictive analytics assess the risk associated with the borrower and how the contract will play out down the road. With the assets, the same techniques are implemented to determine an accurate fair market value of the vehicle and eliminate the additional risks associated with overpriced cars.
This proprietary fintech element to its business is how Axis keeps its risk management ahead of the curve and has directly contributed to the performance of its portfolio over the last few years: 35% yield and 7% losses, even Carfinco hasn’t delivered a performance like this in 20 years.
Such a method of underwriting prevents Axis from taking unnecessary risks, while keeping its underwriting consistent. Consistency in turn, yields better quality applications from dealers and higher deal conversion rates for Axis.
As Ilja Troitschanski explains, the average customer with a credit score between 450-600 and an income of $3,900 a month is looking for a monthly payment of ~$400 on an $11,000 lease over 48 months.
“You would not believe the number of people who cry happy tears at our office because they actually got a vehicle. These are vehicles people use to go to and from work. In many case, if a person doesn’t have a vehicle, they can’t go to work and provide for their family.”
Advocating for car buyers may not be the immediate image pictured when thinking of a non-prime auto lender, given the higher interest rates on their loans, but installment loans are statistically the most solid way to build a better credit score.
Axis contracts are fully open, no interest penalties or termination fees. 30%-40% of Axis’ customers pay out early, often within the first 118-24 months. All of Axis’ loans are reported to a credit bureau and after 18 months of periodic payments many customers’ credit scores improve sufficiently to be able to get bank financing for their car.
Taking a look down the road, Axis Auto is working on getting bank funding over the next six to nine months. This could add significant value to its stock as it would sharply cut borrowing costs, turning into a huge driver of net earnings. Over the next 12 months, the Company expects to grow its nationwide presence while its competitors show signs of throttling back. On the West Coast, Axis plans to expand organically, while it works to acquire businesses in Québec. The name Axis Auto will likely show up in investor channels as a stock to watch as the Company rolls up more companies and establishes businesses in areas it has yet to penetrate on its path to become a dominate force in the Canadian non-prime automotive finance market.
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www.axisautofinance.ca
FULL DISCLOSURE: Axis Auto Finance Inc. is a paid client of Stockhouse Publishing.