There are no bargains at Easyhome, a lease-to-own business that serves the credit-challenged. For example, a basic Hewlett-Packard computer that retails for a few hundred dollars will instead cost an easyhome customer close to $2,000 in instalment payments over three years.
Easyhome Ltd. shares may be the cheapest thing the company has to offer. The stock has a forward price-to-earnings ratio of less than 7 and a dividend yield that tops 5 per cent. And the Mississauga, Ont.-based company has an emerging consumer-lending business, easyfinancial, whose potential may not be reflected in the share price.
All in all, it’s an intriguing opportunity for investors who have no qualms about the company’s business model.
Qualms? I have to admit to some. The idea of a $2,000 HP or $3,000 in payments for a basic set of Maytag laundry machines strikes me as absurd. So do the loan terms at easyfinance: A $5,000 loan, at an annual percentage rate of nearly 48 per cent, results in nearly $12,600 in payments over three years.
At the same time, a combination of good fortune and good decision-making means I’ve never been in the place easyhome’s customers are, living paycheque to paycheque with little ability to make a big purchase. As the easyfinancial website notes, “we approve when banks won’t, and we’re way cheaper than a payday loan.”
Easyhome’s original business of leasing merchandise has matured. In the first quarter of 2012, revenue was flat and the lease portfolio declined slightly. The company closed two locations in the quarter, bringing its total stores to 216. (Plans were to close about a dozen more this quarter.) Operating margins fell a couple of percentage points to 15 per cent.
It is easyfinancial, which makes loans to consumers primarily through in-store kiosks, which offers the most promise. With margins more than double that of the leasing business, it’s already an outsize contributor to profit. Easyfinancial generated $8.2-million in revenue in then March quarter – 80 per cent above prior-year levels – and produced $2.8-million in operating profit. By comparison, the traditional business posted $41.2-million in sales but just $6.2-million in operating profit.
The company, however, needs more capital to expand the easyfinancial business. The uncertainty over the expansion plans, coupled with an earnings miss in the March quarter thanks to higher-than-expected stock-compensation expense, sees the shares trading around $6.50, the midpoint between its 52-week high and low.
It’s worth noting the company has quite a bit of what we can call “headline risk”: It restated its financial statements in early 2011, then saw the majority of its board resign simultaneously, with no explanation, in December. If you’re into red flags, consider them waved.
“Valuing easyhome on a sum-of-parts basis, investors buying at current levels are essentially paying only for the leasing business while getting the high-growth and high-margin consumer lending business for free,” Cormark Securities Inc. analyst Jeff Fenwick wrote in December, when the shares were a hair below $7. He still believes it today, with a “buy” rating and $10 target price.
Mr. Fenwick sees about 12 new easyfinancial locations in the second half of the year, versus the roughly two per quarter in the first half.
The new locations’ start-up costs and slow revenue ramp-up will mean the easyfinancial segment’s margins will likely drop to the 25 per cent to 30 per cent range in coming quarters, Mr. Fenwick predicts. In the longer term, “demonstrating the ability to produce margins of 30 to 35 per cent or higher is essential to justifying easyhome’s substantial efforts to grow this new line of business.”
The expansion is predicated on closing the deal for new capital. That announcement should be the next catalyst for the stock, believe Mr. Fenwick and analyst Spencer Churchill of Paradigm Capital, who also has a $10 target price and “buy” rating.
The company, which previously sold stock at $8.50, is believed to prefer raising $20-million to $30-million via debt, Mr. Churchill says.
A resolution has been expected by the quarter’s end, which is this week. Should easyhome nail down the deal on favourable terms, the shares could bounce. And if easyhome can then execute on its expansion plans, the stock could rise even more.
Although it may never be as expensive as a $2,000 computer or a loan with 48 per cent interest.
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