ELEVATE CREDIT INC ELVT
January 30, 2018 - 6:29pm EST by
madler934
2018 2019
Price: 7.33 EPS 0 0
Shares Out. (in M): 46 P/E 0 0
Market Cap (in $M): 336 P/FCF 0 4
Net Debt (in $M): 425 EBIT 0 0
TEV ($): 759 TEV/EBIT 5 3.5

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Description

How many companies out there do you see trading at 5x 2018 EBITDA, have enormous returns on capital, a clear multi-year growth opportunity and an exceptional management team?  Probably not too many…and I bet I got your attention…until you read the next sentence and I ruin the whole thing.  They are a payday lender….there we go, I said it.  If you are still reading I was half joking; they are not actually a payday lender, but they operate in the subprime space occupied by pawn shops, rent to own retailers and yes, payday lenders.  And when I say subprime, I’m not kidding – this is really really subprime, let’s call it “exceptionally subprime”.  When you need a $2,000 line of credit and are willing to pay 100% interest, these are the guys you go to (and you might consider retiring from the investment management industry at the same time).  ELVT is an online lender to this customer set - and they benefit from the slow demise of the brick and mortar universe of payday, installment, rent to own, and pawn shops.  They have the advantage of being a pure online business, with the benefits of scale and lower infrastructure costs that affords.  I focus on businesses that are under the radar, and for whatever reason other investors won’t touch them, particularly when they are actually really attractive businesses.  See my recent VIC write-up on RMR as a good examples of this set up.  That is exactly what we have here with EVLT: a business that has some warts and on the surface undesirable characteristics (you say the word payday and your multiple immediately gets cut in half), but when you actually get in to the details I believe you will probably find that this is actually a pretty nice business with lots of growth, good management and a really low valuation.  I will also apologize in advance for what will be a short and hastily written write-up.  I’m just too darned busy right now with annual letters and everything else to compose a white paper.  I just wanted to put the idea out there to the community because I do think it’s interesting – hopefully you’ll get the gist of things from reading this abridged description.

What they are:  a pure online “exceptionally subprime” lender.  They have a RISE installment loan which carries a triple digit APR and an average loan size of $2,500 or so.  They have an ELASTIC line of credit  with a $1,775 average loan size and a 96% APR.  They also have a small SUNNY business in the UK, which is an installment loan business.  They call the company ELEVATE, because (seriously) they view themselves as the good guy lender in this space – despite the absurd interest rates they charge, they are far less absurd than what you would find at the storefront lenders who serve the same borrower.  So we will call them “the less absurd but still absurd exceptionally subprime lender”.  This is all sort of tongue in cheek, I do actually believe they take that seriously and they are a much better option for the borrower than the storefront lenders who frequently charge in excess of 300% APRs.  Elevate will also lower the interest rate over time as they gain scale (they have done this historically) and as they gain experience with a particular borrower.  And they report to the credit bureaus so that if you pay them back they will help you build your credit. 

Why I like it: 

·         Benefits from the demise of the legacy payday loan industry.  Let’s identify specifically who this is.  The big players are Check into Cash, Advance America, Check n Go, Community Choice Financial and Moneytree.  There are many more players in this space, but the aforementioned companies have literally thousands of stores in aggregate even though you probably have never been to one.  This is a huge open market opportunity as these players continue to shrink.

·         Pure online model has a cost advantage vs. bricks and mortar which is passed on to the borrower in the form of a lower rate.

·         There is a limited competitive set in this space: Enova, Curo, and Elevate.  There is a private company called LendUp which you could throw in the mix as well but they are more of a subprime player as opposed to exceptionally subprime.  The business model sits at the crossroads of a bunch of different disciplines, including:

o   Financial - Knowing how to underwrite for this type of borrower, having the analytics, risk controls etc. (a very specific niche within lending)

o   Technology – having the tech savvy to win online and be able to attract borrowers / build an online presence.  In other words, customer acquisition and digital strategy.

o   Regulatory – being savvy enough to understand the nuances of the state by state regulatory framework and how to tailor products and underwrite those products on a state by state basis to play within that framework.

o   Access to capital – it is not easy to attract capital to this type of lending because it is so specialized.  There are few providers of credit which creates a significant barrier to getting in to the space.

None of these is difficult to achieve independently, but being able to do all four absolutely is difficult which is why the competitive universe is narrow in what is generally thought of as a commoditized activity (lending money).

·         They have a relationship with Republic Bank & Trust which is a unique competitive advantage.  ELVT issues ELASTIC loans through its bank partner, Republic.  By working with a bank partner, ELVT circumvents state usury laws.  Most lenders in this space operate in just a few states.  ELASTIC is available in 42 states, which is a huge footprint and a competitive advantage.  For example, in states like Maryland or Georgia where there are rate caps, Elevate can walk into the market and offer their ELASTIC product to a borrower with no other option.  In many of these states there is very little competition from a similar loan product and these bank relationships are difficult to set up.  Enova has a similar set up for its NetCredit loan (not a competitive loan to ELASTIC), otherwise I am not aware of any similar arrangement in the market.  This creates a nice wide open space for ELASTIC to grow in the next few years.  Take a look at the growth in the ELASTIC portfolio over time.  This isn’t slowing down, its full steam ahead – we see ELASTIC as the biggest driver of growth in the next 2 years.  It’s not just about having little competition in this specific product in 42 states, the open ended credit product is also proving in the industry to be the borrower’s choice.  We see the growth trajectory continuing, unabated. 

·         Amongst its competitive set, Elevate has carved out a nice niche in between at the low end Enova’s CashnetUSA and Curo’s “Speedy” (these are the lowest credit options), and at the higher Enova’s NetCredit or LendUp.  They are thus in a sweet spot right now that is not being targeted by their significant competitors.

·         This management team is great.  Highly focused, on top of the numbers, a very long background in the space, well incentivized.  You will find some hair as you go through things but it all checks out fine.  Don’t freak out over the ThinkFinance bankruptcy as I did – there is no connection to Elevate, just saving you some potential stress.  Some of the comments I heard in my due diligence:

o   “Ken Rees is one of the smartest people in financial services hands down.  He has managed through every single loophole or grey area.  Very creative.”

o   I have a huge amount of respect for Ken, he is better than any CEO I had at [(omitted) prior employer a $10b+ dollar technology company].  – this is from a former executive.

o   “some of the smartest operators in the space” – from CEO of a competitor

o   “they are much more innovative than Enova…very good a going out and grabbing customers that they have not lent to before”

·         Valuation.  I have it at 5x 2018 and mid 3s multiple on 2019 EBITDA.  There is very little capex in the business.  So it is asset light and growing.  I see them executing over the next two years and then I see investors taking notice and it becoming a more mainstream stock.  I see big multiple expansion – it is a pure online business, high returns on capital, high margin structure business, lots of growth.  I can see this trading in 18 months at a 9x multiple on 2019 at which point the stock would be at $35 or so.  9x might seem aggressive but take a look at FirstCash (FCFS).  There is precedent for these businesses trading at high multiples when they are performing well as I expect Elevate to.

·         You will notice they have debt at a low teens interest rate.  It looks terrible on the surface.  I think it could be easily refi’d today but there is a prepay penalty until q1 2019.  This is another thing that will improve optically over the next 12 months.  A year from now they will have a much more traditional capital structure.

Regulatory:  No discussion of this space is not complete without a riveting discourse on the regulatory picture.  Let me sum it up really briefly.  There is federal and then there is state regulation. 

Federal – the small dollar rule is out there, it goes into effect in 2019.  Simply put, it is very favorable to Elevate and has virtually no impact on their business.  But it will have a negative impact on the payday lenders and accelerate their demise.  So I view it actually as a positive.  Whether it is actually implemented or not under the Trump administration is a question mark.  I hope it does get implemented as it will provide regulatory clarity.  Let’s call it 50/50 at this point if it actually goes into effect.

State – Each state is on its own and it’s a maze of regulations.  This is one of the challenges of operating in the space.  There is nothing specific right now that I am concerned about.  But any year there will be some headline risk – some state will have a new bill that changes the rule and might impact the industry.  Ohio and California are states I’m watching right now but nothing specific to report.  By the way, with the Republic relationship, ELVT can circumvent the state laws – so worst case scenario they can transition their portfolio from RISE to ELASTIC in a state that passes a new rate cap.  It’s interesting how hard it is to actually change these rules.  California had a big push in 2017 for example to enact new legislation – and even in California (a highly liberal state) the legislation failed. 

Overall regulatory is clearly an issue but the environment right now is fine.

How we got here:

Elevate was borne out of ThinkFinance (TFI) in a spinoff in 2014.  TFI had been around in various forms since the early 2000s and Ken Rees was with that company for the entire time.    They were “forced” to go public at a terrible time by the venture capital firms that have been held hostage in TFI for nearly two decades.  It went public in a botched offering and they have received very little attention since the IPO.  As I said at the beginning, this entire space is very much out of favor.  About 20% of the shares are held by early investors and employees who are just looking for liquidity at this point and selling shares daily into the market.   Insiders have been modest buyers in addition to the stock they currently own.  Overall the awareness of Elevate amongst investors seems to be really low.  As stated, we think it is a good business with a very strong trajectory over the next few years at a low price. 

 

 

 

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Results, cash flow generation, investors getting to know a company that is currently unknown

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