Investor Roundtable

Report
Brian Korn, Pepper Hamilton LLP
John Hecht, Jefferies, LLC
Suketu Shah, AvantCredit
Croom Beatty, Susquehanna Growth Equity, LLC
#LEND360 ● LEND360.org
Agenda
Consumer Finance: Innovation Amongst Ongoing Disruption
• Market Update
– Trends in Online Payday Lending and Installment Lending
• What’s Going on Today - A Bridge to the Future
• Public Market Update
• Forward-Looking Thoughts
2
Jefferies LLC
Market Update – Trends in Online Payday and
Installment Lending
3
Jefferies LLC
Single-Pay Market Update
Recent Trends and Developments
Volumes and revenues decline due to regulatory interference/shift to multipay product…
Single-Pay Loan Revenues- St ore versus Online
Single-Pay Loan Volum es - St ore versus Online
$10.0
$60.0
$9.0
$50.0
$8.0
$7.0
$40.0
$B
$B
$6.0
$30.0
$5.0
$4.0
$20.0
$3.0
$2.0
$10.0
$1.0
$0.0
$0.0
2006
2007
2008
Retail
2009
2010
Online
2011
2012
2006
2013
2007
2008
Retail
Total
2009
Online
2010
2011
2012
2013
Total
While loan loss provisions increase modestly…
Payday Provisions/ Revenues
40.0%
35.0%
29.5%
30.0%
25.0%
26.7%
24.0%
23.5%
20.1%
25.7%
25.5%
24.0%
28.9%
25.9%
24.9%
22.8%
20.0%
17.1%
15.0%
12.3%
13.9%
10.0%
5.0%
0.0%
Source: Jefferies LLC / company data
4
CSH
DLLR
EZPW
2011
2012
FCFS
2013
CCFI
Jefferies LLC
Single-Pay Market Update
• Volumes declined ~6% while revenues declined ~3% in 2013 as…
– Industry consolidation continues/small operators close up shop
• Total domestic storefronts continue to decline ~3.5%
– Operation Chokepoint disrupts online lender and lead gen. markets
– Migration towards multi-pay products
• Regulatory focus is at Federal Level, State activity is relatively quiet
• Credit Costs / Provisions continued to grow YoY in 2013 due to:
– Operation Chokepoint disrupted ACH process
– Migration to new product/customers
• Innovation remains a key theme:
– Balancing customer demands and potential regulatory shifts
Source: Jefferies LLC
5
Jefferies LLC
Installment Lending Market Update
Recent Trends and Developments
Volumes increased 20% while revenues climbed 15% for public installment
(multi-payment) lenders…
Annual Installment Volumes - Public Filers
Annual Installment Revenues - Public Filers
$3,500
$1,000
$3,000
$800
$2,500
$600
$M
$M
$2,000
$1,500
$400
$1,000
$200
$500
$0
$0
RM
LEAF
2011
2012
WRLD
RM
2013
LEAF
2011
2012
WRLD
2013
Credit performance appears company-specific, but generally stable
Annual Installment Provisions- Public Filers
30%
25%
$M
20%
15%
10%
5%
0%
Source: Jefferies LLC / company data
6
RM
LEAF
2011
2012
2013
WRLD
Jefferies LLC
Installment Lending Market Update
•
Less perceived regulatory risk than single-pay product
•
Volumes and revenues both grew >15% in 2013 driven by
– Ongoing tailwinds from diminished supply of consumer credit in downturn
– Payday lenders rotating into installment
– Growing customer demand for borrowing from middle and lower income
•
Ongoing development of a broad, two-tier Market:
– Small loan segment (<$1,000) with smaller balances/higher yields and
shorter duration (3-12 months)
– Large loan segment ($2,000+) with higher balances/lower yields and
longer duration (9 months-3yrs +)
•
Credit trends primarily stable; but we observed some company specific issues
•
Competition is increasing with more lenders entering the market, but we
continue to see opportunities for growth for those with unique customeracquisition strategies (online, live-check, etc.)
Source: Jefferies LLC
7
Jefferies LLC
Recent Market Trends
•
•
•
Overall lending/borrowing trends:
–
We have continued to see growth in installment loan volumes and revenues, partially attributable to further
migration from single-pay to multi-pay
–
We have observed emerging credit concerns, although these appear company specific and not systemic
–
Overall, loan demand is consistent or modestly growing while credit is generally stable
Regulatory:
–
Awaiting Rule Proposal from CFPB pertaining to payday loans
–
CFPB and other Federal regulators are increasingly active in the space, issuing CIDs to numerous market
participants covering various products
–
Federal regulators appear to be increasingly focused on factors pertaining specifically to online lending
Payday / Single-payment Product Trends:
•
•
Installment Lending / Multi-payment Product Trends:
•
Pockets of growth potential exist due to loan demand and differentiated customer acq. models
•
Competition is increasing but operating metrics still suggest a rational environment
•
The re-emergence of traditional lenders is worth keeping an eye on… we are seeing some signs of traditional
lenders, such credit card issuers moving slowly down the credit spectrum
Source: Jefferies LLC
8
Payday lending continues to contract modestly given migration to installment lending, customer preferences
and regulatory pressures
Jefferies LLC
What’s Going On Today – A Bridge to the Future
9
Jefferies LLC
Regulatory Update
•
•
Relative status quo at state level
–
Continue to watch municipal activity (TX)
–
Many states have addressed lending rules recently, and may be watching the Fed to
determine what to do next
Federal activity has increased
–
–
•
UK Activity
–
Regulatory reform in UK is largely crafted and deployed (with rate caps coming in a few
months)
–
Industry currently experiencing ‘fall-out’ as operators migrate to new rules
Source: Jefferies LLC
10
Operation Choke Point (DOJ, FTC, OCC, FDIC involvement)
CFPB
• Issues 2nd white paper focused on roll-overs / repeat usage
• Engages in enforcement actions and issues CIDs to ‘peripheral’ industries
• Accepting payday lending complaints
• Anticipates issuing Advanced Notice of Proposed Rulemaking
• Issues more commentary specific to Online lending (data safety, etc.)
Jefferies LLC
Operation Choke Point
• Ongoing Influences of Operation Choke Point
– We believe Offshore and State Export model activity has been severely
constrained
– Tribal / Sovereign Nation model has been negatively impacted, and
operators appear to be migrating models / products
– Migration away from payday lending
• Innovation in customer sourcing and product development
– Issa Report issued on May 29th
• Critical of negative impacts to legitimate merchants
Source: Jefferies LLC
11
Jefferies LLC
Innovation!!!
• Recent regulatory activities reinforce the importance of innovation for
the alternative financial services industry
– Migration away from payday lending
– Increased focus on multi-payment / installment products
– Lenders appear focused on developing a continuum of products which
adjust pricing for risk and allow borrowers to improve their access to
credit and overall cost of credit
– Incumbent operators and new participants are building for the future developing models with flexible and long term approach
Source: Jefferies LLC
12
Jefferies LLC
Marketplace Lending
•
‘Marketplace Lending’ is a term that captures the trend of disintermediation:
whereby online marketplaces develop to create platforms to connect
borrowers with lenders
– The concept primarily relates to peer-to-peer lenders, but increasingly
reflects a focus on disintermediating the system away from traditional
lenders, towards more focused, streamlined and efficient lenders
– More broadly, we are observing the emergence of lenders who are taking
the shape of a Marketplace Lender by carving a niche (demographic or
credit based) and building a brand and ecosystem in order to ‘own’ that
specific niche over time
• Peer-to-peer lending
• Consumer lending (installment and payday lending) focused on
specific demographic or income segments
• Purchase finance...Etc, Etc, Etc...the market opportunities are endless
Source: Jefferies LLC
13
Jefferies LLC
Marketplace Lending
•
Why are borrowers, investors and operators focused on Marketplace lending?
– Banks / regulated entities are less efficient:
Peer To Peer Op Ex.
To Loan Balance
Bank Op. Ex to
Loan Balance
310 BPS
695 BPS
~400 BPS Cost Advantage
Lower potential lending rates
Higher potential Investor Returns
– Consumers do not necessarily prefer banks:
Source: St Louis Fed. Federal Reserve. Edelman PR Firm
14
Jefferies LLC
Near Term Developments
• Two important potential near term developments are worth following:
– Lending Club IPO
– Enova spin out
• These two events would result in having two independent, Online
consumer finance companies (or Marketplace Lenders) owned and valued
by institutional investors in a public forum
• May alter the paradigm for consideration of public valuations for certain
lending models
Source: Jefferies LLC
15
Jefferies LLC
Public Market Update: Valuation Trends
16
Jefferies LLC
Comparative Valuations of Public
Alternative Consumer Lenders
9/ 24/ 2014
Com pany Nam e
Sym bol
Pr ice
Rat ing
Pr ice
M ar ket
Tar get
Cap ( $ M M )
2014E
JEF CY EPS
2015E
2014E
JEF CY P/ E
2015E
EPS Gr ow t h
1 4 -1 5 Est .
P/
BV
2013A
JEF EV/ EBITDA
2014E
5.63x
Nonpr im e Consum er Finance
Cash America International, Inc.
EZCORP, Inc. Class A
First Cash Financial Services, Inc.
Regional Management Corp.
CSH
$44.15
NC
NC
$1,275.4
$4.35
$4.73
10.16x
9.34x
8.7%
1.14x
6.63x
EZPW
$10.08
Hold
$11.00
$510.2
$1.25
$1.63
8.07x
6.20x
30.2%
0.60x
4.83x
5.29x
FCFS
$56.15
Hold
$56.00
$1,598.6
$3.00
$3.37
18.71x
16.66x
12.3%
3.92x
12.36x
11.21x
11.36x
RM
$18.06
Buy
$22.00
$229.6
$1.69
$2.69
10.69x
6.71x
59.2%
1.42x
8.98x
LEAF
$32.50
Buy
$39.00
$3,732.1
$2.04
$2.34
15.95x
13.89x
14.8%
2.42x
NA
NA
W RLD
$70.47
Hold
$88.00
$680.6
$10.06
$11.43
7.01x
6.17x
13.6%
2.35x
6.43x
6.33x
M ean
1 1 .7 6 x
9 .8 3 x
2 3 .1 %
1 .9 8 x
7 .8 4 x
7 .9 6 x
M edian
1 0 .4 2 x
8 .0 3 x
1 4 .2 %
1 .8 9 x
6 .6 3 x
6 .3 3 x
Springleaf Holdings, Inc.
World Acceptance Corporation
•
•
Nonprime finance names trade in a wide valuation range - from ~6x to 16x+ CY 15 EPS estimates
–
Average P/E multiple of 10x and average EV/EBITDA multiple of 8x.
–
These represent discounts to the last expansion cycle
What matters to public investors that drives valuation?
–
•
What interests investors?
–
17
P/E, EV/EBITDA, growth opportunities, regulatory risk (and product mix) as well as credit risk/collateral
Getting ahead of a regulatory shift; swings in consumer credit trends; growth opportunities
Source: Jefferies LLC / FactSet / company data. Note, estimates for CSH reflect FactSet Consensus.
Jefferies LLC
Valuation Trends – EV/LTM EBITDA
12.0x
11.2x
10.0x
8.0x
6.0x
8.7x 8.9x
7.2x
6.8x
6.3x
5.0x
8.0x 7.8x
7.4x 7.5x
7.5x
8.1x
8.5x
6.8x
5.4x
4.0x
2.0x
0.0x
EV / EBITDA (TTM)
•
Nonprime consumer valuations have primarily trended up since the recession,
although not to the same extent as the broader market
•
Overall, multiples are lower than long term averages for expansion cycles, likely due
to regulatory uncertainty and residual concerns related to the last recession (credit
risk, etc.)
•
Regulatory clarity/maturation, ongoing innovation, technology deployment and
economic growth may serve to enhance industry multiples over time
18
Source: Jefferies LLC / FactSet / company data. Peer group includes CSH, DLLR (prior to 3/31/14), EZPW, FCFS,
RM and WRLD.
Jefferies LLC
Forward-Looking Thoughts
19
Jefferies LLC
Forward-Looking Thoughts
• The regulatory framework is maturing, which should enforce the
following tendencies:
– Ongoing product innovation:
• Focus on multi-payment products, risk adjusted pricing, customer
loyalty (or reward) programs
– Consolidation – with large players gaining market share
– Focus on compliance as a core competency (and rising expense, which
is easier for larger market participants to absorb)
Source: Jefferies LLC
20
Jefferies LLC
Forward-Looking Thoughts
• We expect further development of Marketplace Lenders
– New and incumbent operators will continue to seek control of a
specific/niche market
– Operators will build a specific / focused brand, fluid product sets and
customer loyalty programs to attract and retain customers
– Market participants will ‘win’ control of a market based on brand
recognition, market share, and operational scale potential (like many
Internet models)
– Ongoing product development and differentiated business models will
be key for customer acquisition and retention
Source: Jefferies LLC
21
Jefferies LLC
Forward-Looking Thoughts
• End market trends are supportive for alternative consumer lending:
– Traditional sources of capital remain restricted in providing credit to
middle and low income borrowers (although they are slowly coming
back)
– Middle and low income borrowers are slowly beginning to feel better
about employment opportunities, and may begin to feel better about
borrowing over time
– Increasing taxes, rising costs of living and slow wage growth also
support the ongoing need for credit from this borrowing class
Source: Jefferies LLC
22
Jefferies LLC
Forward-Looking Thoughts
• Regulators will continue to increase focus on this segment
– Recent actions from the CFPB, DOJ and FDIC suggest there will be
more coordination amongst Federal regulators
– We anticipate more activity out of the CFPB (such as a Rule Proposal)
– Increase frequency of CIDs across multiple product sets suggests that
Federal regulators are evaluating many different services and may
increase their scope over time
Source: Jefferies LLC
23
Jefferies LLC
Important Disclosures
24
Jefferies
JefferiesLLC
LLC
Important Disclosures
Analyst Certification
I, John Hecht, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
I, Kyle Joseph, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
I, Michael Del Grosso, certify that all of the views expressed in this research report accurately reflect my personal views about the subject
security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed in this research report.
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Important Disclosures Cont’d
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28
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John Hecht
[email protected]
415.229.1569
Kyle Joseph
[email protected]
415.229.1525
Michael Del Grosso
[email protected]
415.229.1576
Jefferies LLC

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