Strong Recovery in the Offing: goeasy Ltd (TSX: GSY) provides lending and leasing services to non-prime Canadians through its easyhome and easyfinancial business segments. Despite strong financial performance, goeasy stock has taken a fair amount of beating, courtesy to the rapid spread of coronavirus which has taken a toll on the economy. GSY stock has corrected more than 40% YTD (despite increasing more than 30% in the last five trading days).

In response to the COVID-19 outbreak, GSY has announced several measures to strengthen its balance sheet and enhance liquidity. GSY issued US$ 500 million (or CAD 714 million) unsecured notes payable with maturity in December 2024. The company also amended its revolving credit facility to increase the amount to be borrowed to CAD 310 million.  

Financial highlights: goeasy posted revenues of CAD 609.4 million in FY19, up about 20% y-o-y as compared to CAD 506.2 million in FY18. The y-o-y growth reflects continued growth in consumer lending. Same store sales registered a growth of 19.5% y-o-y. Investors should note that the company’s same store sales have increased in the past 39 consecutive quarters, which is phenomenal. By segments, easyfinancial division recorded a 27.7% jump in revenues to CAD 470.2 million, thanks to the stellar growth in the gross consumer loans receivable portfolio. However, lower yields remained a drag. easyhome segment’s revenues showed about 1% growth to CAD 139.2 million, as benefits from growth in lending revenue was partially offset weakness in the traditional leasing business. The company’s operating expenses before depreciation and amortization came in at CAD 376.2 million, up about 12.5% year-over-year. The y-o-y growth reflected higher costs associated with the expanding easyfinancial business. However, operating expenses before depreciation and amortization as a percentage of sales improved to 61.7% in FY19, as compared to 66.1% in FY18. Operating income increased 41% y-o-y to CAD 168.8 million. Finance costs stood at CAD 79.3 million, reflecting increase in average borrowing levels offset in part by lower borrowing cost. The company posted adjusted net income of CAD 80.3 million, up about 51% y-o-y. Investors should take a note that the goeasy’s net income has increased for 74 consecutive quarters.

Financial Highlights (Source: Company Reports)

Stock recommendation: goeasy’s exposure to non-prime borrowers sent investors in a tizzy as weak economic outlook and rising unemployment rate could pose significant challenges for the company. However, the company has developed a niche in the non-prime lending and uses proprietary models to adjust its underwriting process in response to changing market conditions. goeasy continues to run its business with little disruption and has ample liquidity to fund the planned increase in the consumer loan portfolio till the third quarter of 2021. The sharp decline in goeasy stock makes it an attractive bet at the current levels. GSY stock trades at a forward PE multiple of 5.9x, which is well below the peer group average of 9.6x. We recommend a “Speculative Buy” on goeasy stock at the closing market price of CAD 39.11 on April 13, 2020.

GSY One-Year Daily Price Chart (Source: Thomson Reuters)

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