Goeasy Ltd. : Canada's nugget?

GoEasy is a Canadian company specializing in loans to so-called non-prime consumers, i.e. those who have difficulty accessing credit from traditional banks and financial institutions.

In Canada, non-prime customers are those with credit scores below 720. They account for 9.3 million of the 31.8 million Canadians with an active credit file. GoEasy serves around 1.4 million of them through over 400 locations and 9,500 merchant partners.

Overview of the major market in which GoEasy operates (source: Investors Presentation March 2024)

GoEasy operates through two main divisions:

• EasyFinancial is the main organization, granting loans of up to $100,000 with interest rates ranging from 9.9% to 46.9%. Generally speaking, secured loans (against residential property, a car or personal assets, for example) range from $500 to $27,500, with repayment periods of between 9 and 84 months. Unsecured loans range from $15,000 to $100,000, with repayment periods from 48 to 120 months.
• EasyHome is Canada's largest rent-to-own company by number of stores, offering customers furniture, appliances and electronics. Customers are mostly people who are unable to purchase the goods due to insufficient financial resources, but who may need the equipment in the short term. They may also want to use the goods, without any long-term obligation, before making a purchasing decision. They don't need a deposit, and there's no credit check required. They have the flexibility to cancel their lease at any time without penalty. EasyHome accounts for 12% of GoEasy's revenues.

EasyFinancial and LendCare operate in much the same way: they are grouped together under the same accounting division, EasyFinancial, as mentioned above (source: GoEasy).

In GoEasy's business, the difficulty lies in striking a balance between the credit losses associated with customers who cannot repay their loans (given that non-prime borrowers are more at risk than prime) and profitable volume. GoEasy could accept more risk to stimulate greater growth and profitability, but this would entail higher credit losses and have impacts on the cost and availability of access to capital.

What does this mean in financial terms?

Let's take as our base the results for the second quarter of 2024, which correspond to the latest published figures.

On loan growth:

• Credit applications reached a record volume, up 34% year-on-year.
• The company recorded a record number of new customers, at +48,200.

On loan performance:

• The net charge-off rate, which corresponds to the percentage of outstanding loans considered irrecoverable, was 9.3%. This rate is in line with the company's target range of 8% to 10%.
• The loan loss provision rate, which is the percentage of money the bank sets aside to cover loans that may not be repaid, fell to 7.31%. Given the risky nature of the business, provisions are high (CAD 342 million last year, compared with net income of CAD 248 million). However, these provisions remain, for the time being, confined to satisfactory ratios.

On overall financial performance:

• Quarterly sales continued to grow, reaching CAD 378 million.
• Profitability is close to record levels and continues to improve. Operating margin stood at 39% and net margin at 17.3%. Earnings per share maintained their strong growth trajectory.
• Debt levels have accelerated in recent years as a result of the company's growing business. Since 2021, GoEasy has issued CAD 4 billion in long-term debt.

Everything seems to be going well. GoEasy is a true growth company. If we broaden the spectrum of analysis over the decade between 2014 and 2023, revenues have increased almost 5-fold, from CAD 259 million to CAD 1.25 billion. Operating margin tripled and earnings per share rose from CAD 1.42 to CAD 14.48. However, let's not forget the speculative aspect of the case. The P/E of just 11 times is justified by the risks inherent in the business.

The outlook is encouraging. Growth to 2026 should be marked by continuity with what has been achieved in the past. The company communicates in particular on sales and ROE (Return On Equity). These two variables should continue to grow at a steady pace. The management team is also proclaiming loud and clear its future objective: to tackle the international market. To be continued.