goeasy provides financial services to purchasers and lessees of its furniture, electronics, computers, and appliances.
Toronto-based Raymond James Financial analyst Stephen Boland resumes coverage of financial services stock goeasy Ltd. (TSX—GSY) at an opportune time. The COVID-19 pandemic is having a meaningful impact on the credit results of Canadians.
goeasy Ltd. provides financing to buyers of its furniture, electronics, computers, and appliances. It also offers merchandise leasing of household furnishings, appliances, and home electronic products to consumers under weekly or monthly leasing agreements. Its reportable business segments include easyhome and easyfinancial. It earns most of its revenue from the easyfinancial segment.
GSY is one of Canada’s leading consumer lenders that focus on the non-prime segment of the population. This market segment that goeasy feeds was already growing before the pandemic, and Mr. Boland suggests it is a market that will likely grow further following the broader economic shutdown. While some will be unable to pay their loans, the analyst suggests goeasy can take the hit.
EPS and dividends will rise in 2020
Also GSY’s current valuation is attractive to Mr. Boland as the stock is trading at the lowest level in 18 months. He further suggests it will have enough capital and liquidity to increase earnings per share (EPS) and dividends (of $1.80 per share) for 2020.
Mr. Boland initiates his coverage with an “outperform” recommendation.
The analyst points to the unemployment rate in Alberta doubling to 10 per cent in 2015 with the decline of oil prices and the subsequent downfall of the Albertan economy. In that province, the analyst calculated the charge-off rate (i.e. no chance to collect owed loan assets) in that loan portfolio increased to 16.5 per cent from 14.5 per cent the year earlier.
This time around, the analyst increases his overall charge-off rate for 2020 to 14.9 per cent from 13.3 per cent in 2019. Even if he assumes a 17 per cent charge-off rate for this year, GSY would report similar diluted EPS to 2019 of $4.17.
Available cash should maintain growth
Mr. Boland estimates that every one per cent increase in the charge-off rate on an annual basis lowers EPS by $0.52 per year. The analyst forecasts EPS of $6.09 for 2020 and $7.70 for 2021, even with slowing loan growth and store openings dropping to nil through the next six months.
“Before the formal ‘lock-down’, management indicated with its borrowing capacity from the credit facility, cash on the balance sheet and cash flow that growth could be maintained until third-quarter 2021. Since the growth has slowed, and discretionary spending and advertising is on hold, we believe that forecast is still relevant even with a spike in charge-offs,” says Mr. Boland.
This is an edited version of an article that was originally published for subscribers in the May 22, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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