Cash Store Financial Services Inc., struggling with regulatory issues, may ultimately have to cash out of Ontario. Could this mean easy money for shareholders of Easyhome Inc.?
It's an intriguing theory rising out of Cash Store's recent difficulties. The Edmonton-based company has ceased lending at all of its 200-plus Ontario locations in the wake of a recent court decision. Easyhome, which has been expanding past its traditional leasing business to make more consumer loans, would presumably like a fair number of those storefronts in order to keep growing.
This theory may be gaining traction: Easyhome's shares have risen as much as 16 per cent over the past two weeks as Cash Store has disclosed its troubles. At least one analyst is on the record with the idea, and his estimates of the huge boost to earnings that could result if Easyhome can make such a move. If he's right, Easyhome shares could be a bargain.
It's worth emphasizing that Cash Store has given little indication it's giving up on Ontario, as it's hired chief compliance and regulatory affairs officers and created a special, independent committee of its board of directors to deal with its problems.
Cash Store had been operating in Ontario without a payday-loan broker's licence, saying its "lines of credit" were different products, not subject to the oversight of provincial payday-loan regulators. However, the Ontario Superior Court of Justice ruled last month that Cash Store needs the licence to operate. Ontario regulators said they plan to refuse to issue the licence, which Cash Store had already applied for ahead of the ruling. (The company is appealing; a spokesman says it will make no comment outside periodic news releases.)
Even though Cash Store has more than half of its locations outside Ontario, the market sees this as an existential problem for the company. Its shares have fallen by two-thirds since mid-February, to 34 cents apiece, and its debt is trading at distressed levels of less than 25 cents on the dollar.
What's bad news for Cash Store shareholders might be a boon to those who own Easyhome stock. The company's original business is leasing merchandise to the credit-challenged. It has also introduced Easyfinancial, a business that makes consumer loans at an annual rate of 46.96 per cent – still much lower than the effective cost of a payday loan, the company notes. Easyfinancial's high-margin business has been the company's primary driver of growth.
Analyst Doug Cooper of Beacon Securities has a "buy" rating on the stock and a $22.50 target price, about 30 per cent above Wednesday's close of $17.12, based on the company's current footprint and growth potential.
Mr. Cooper notes the two companies' customer bases don't overlap perfectly, as some Cash Store clients wouldn't qualify for an Easyhome loan. But many strip malls, he says, won't lease to both a payday lender and Easyhome, so if Cash Store created vacancies, Easyhome could quickly expand its store count – and possibly pick up the upper tier of Cash Store's customers.
At Wednesday's close, Easyhome traded at about 14 times forward earnings, although robust fourth-quarter earnings and increased guidance released Wednesday afternoon mean the shares will likely trade higher on Thursday.
And yet, the price could still be right. Mr. Cooper noted that at the Sept. 30 loans-per-location numbers, any new location snapped up from the Cash Store could add $850,000 to the company's loan book. Adding 50 new locations – which may be ambitious, given the company's guidance for 30 to 35 new stores – could add more than $40-million in loans.
Mr. Cooper estimates a $175-million book of loans, just a hair above the new guidance, could produce up to $1.50 per share of earnings. Add roughly 70 cents per share from its legacy leasing business, and Easyhome's P/E looks more like 7 or 8 instead.
Over the next several years, he believes, Easyhome can grow its loans to $500-million, and its earnings per share to $4 or even $5.
This column got on the Easyhome bandwagon in June, 2012, recommending the shares when they traded just above $6 at a time of uncertainty for the company. It's worth noting that adding any Cash Store locations would merely be an acceleration of management's previously stated goals for organic growth.
It seems there's plenty more cash in store for Easyhome shareholders, with or without Cash Store. But the prospect of the sudden expansion makes a "buy" an easy call.