Investment Thesis GOEASY

SUMMARY & COMPANY DESCRIPTION

• Although its income has increased by 20% annually over the past 15 years, it still has
only 1% of the Canadian market.
• The business is in good financial condition.
• It is a sector that is resilient that develops better in crises.
• The management team is encouraged to increase the stock price.
• Shares have been bought back at a price above the going rate.
• Lists a competitive valuation of PE 8,5x P and 2,3x P/B Value.
• A target price of around C$420 until 2026.
Goeasy Ltd. ($GSY) is a Canadian corporation specializing in subprime (high-risk) loans. You
are up against a corporation that has been steadily increasing its sales for the past 20 yearsand its
shares price has increased 65 times over the last 19 years.

The company operates in three segments: easyfinancial, easyhome y Lendcare:

1. EASYHOME

It has been in business since 1990 and is Canada's largest home leasing firm, offering consumers
brand-name furniture, appliances, and electronics through flexible leases. In 2021, It accounts for
18% of Goeasy's income (22% in 2020)

Canadians turn to Easyhome to buy or finance their products through its 158 locations (35 of
which are franchised) and eCommerce platform. Easyhome is a flexible option that allows
consumers to acquire access to the things they need, with the ability to end their lease at any
moment without penalty, with no down payment or credit check.

Easyhome's personnel and office base has allowed the company to diversify its product offering
and suit its clients' broader financial demands.

Easyhome began reporting its customers' payments to credit reporting agencies in 2019 as part of
its commitment to give its clients with a route to a brighter credit future. As a result, Easyhome
consumers can now establish their credit history and utilize the Easyhome transaction as a
steppingstone to other easyfinancial financial products and services.

This division of the business is seeing a small downturn. In 2021, the company's rental portfolio
has shrunk from $8.5 million to $8.2 million. Even though Same Store Sales (SSS) increased by
4.5% in 2020 and by 6% in 2021.

2. LENDCARE

On April 30, 2021, the Company completed the acquisition of LendCare Holdings Inc.
("LendCare"), a Canadian point-of-sale consumer financing and technology company formed in
2004.

LendCare is a consumer lender that offers a point-of-sale solution that allows the clients of its
business partners to finance the purchase of products and services.

LendCare focuses on financing consumer purchases in the power sports, automotive, consumer
retail, healthcare, and home improvement industries using its unique origination software.

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The acquisition of LendCare has accelerated the company's expansion into the POS financing
channel, as well as offered refinements and diversification to the company's credit profile, further
expanding Goeasy across the credit spectrum and raising the average credit score of its borrowers.

LendCare appears in the company's accounts under the Easyfinancial sector.

3. EASYFINANCIAL

Easyfinancial, the company's subprime consumer lending subsidiary, launched operations in 2006
to bridge the gap between traditional financial institutions and costly payday lenders.

This segment offers cash to subprime borrowers in the form of secured and unsecured consumer
loans at varied risk-adjusted interest rates.

Traditional unsecured installment loans, home equity-secured installment loans, motor vehicle
financing, and loans to fund the purchase of retail goods, sports and recreational vehicles, home
renovation products and services, and health care are all available through the organization.

The truth is that the corporation is putting less emphasis on the easyhome segment. As shown in
the graph below, the growth of the easyfinancial segment has been exponential from 2011 to 2012,
to the point where it is now the primary business of $GSY. The easyhome segment has
deteriorated because of the internet and the ability to arrange online financing for household
products.

Source: Goeasy Presentation

The interest rate charged to consumers for loans is how the corporation makes money. In addition,
it provides 90% of loans with default insurance that corresponds to an external insurer. As a result,
you earn from this as well. The many sorts of loans are depicted in the graphic below, along with
their average size, interest rate, and repayment time.

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Source: Goeasy Presentation

BUSINESS MODEL AND STRATEGY

It is normal that at first, you see this company as a risky investment because the subprime loan
sector seems dangerous, especially after the 2008 crisis. This is not the case these subprime
companies were the financial institutions that benefited the most in 2008. You can see this by
looking over the fundamentals of Goeasy at the height of the crisis. The company grew those
years average by 15% in sales.

Source: TIKR

True, there was some loss of profitability during the crisis, but this was due to some manageable
impairments. If we ignore this variable, the company performed admirably at the time. You're
probably wondering, "How is this possible?" How did a subprime company grow during the
subprime mortgage crisis? Very simple. Since 2008, banking regulations have required many
large banks to exit this type of market due to their perceived risk, even though they are not. As a
result, a market with high demand and low supply emerged, causing Goeasy to bloom explosively.

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The major variable in this type of business is unemployment. During the crisis, more clients move
from a prime to a non-prime rating, and non-prime clients who are already in the database increase
the volume and magnitude of loans requested. There aren't many companies in this sector,
especially in Canada, that have the credit quality and reliability that $GSY does. There is limited
competition, especially during times of crisis, because many financial firms fail due to excessive
debt.

Furthermore, during times of crisis, the company reduces or maintains marketing costs since
customers, unable to obtain financing from large banks, seek subprime companies such as
Goeasy. As a result, clients seek you out rather than you seek them out. In this case, the morosity
increases during difficult times, but it is already high. As a result, the company profits from higher
levels of interest. The issue is that the increase of clients, and hence income, is far greater than
the effect of debt and provision for losses.

During the 2008 financial crisis, unemployment in the United States increased from 4% to 11%,
resulting in a 21% increase in subprime loans. I should also mention that having a car is required
in the United States and Canada because it is the only way to get to work, therefore it is the final
expense that customers quit paying. On top of that, we have a drop in defaults on subprime
personal loans. According to a 2016 TransUnion research paper titled "Performance of Personal
Loans in Times of Stress," rates of default for subprime lenders declined during the Dot-Com
bubble and the Great Recession of 2008.

Source: TransUnion Presentation

Although there is more morosity in this sector than in traditional bank loans, it is important to
remember that the type of interest that Goeasy charges are far superior. The average $GSY interest
rate is 43%, whereas banks can charge between 2-3%. This also benefits the company because a
change in monetary policy, and hence in the type of interest rate, does not affect the level of
earnings.

The company's market potential is estimated to be $186 million. Most of this market is
dominated by banks, which hold 64% of the market. $GSY defines its niche market as

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accounting for 28% of high-risk loans. As a result, Goeasy controls around 1% of the $52
billion market.

You can see a summary of this in the following image:

Source: Goeasy Presentation

Because the company only accounts for 1% of its addressable market, there is still lots of
possibility for future development as long as it continues to serve its clients well and meets its
targets. Who is Goeasy's ultimate customer? The target customer falls into the subprime consumer
category. This profile may appear to be scarce, however, it is qualified for 40% of the population
in Canada and the United States. These clients had an average age of 40 years, an annual income
of $53,000, and a credit score of 583.

This profile typically applies to easyfinancial in search of a second opportunity, as 72% have
previously been refused by a bank and are looking to improve their financial condition for
themselves and their families. Furthermore, contrary to popular belief, they are persons with a
high level of education; 80% have a high school diploma or a university degree and earn the
credits when an emergency occurs.

Source: Goeasy Presentation

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Regulations may be one of the most important elements to keep an eye on. According to the
federal criminal code, the highest interest rate that can be imposed for this type of loan is 60%.
Goeasy never exceeds these criteria. There is a risk because this interest rate is revised year,
however, it has been similar in Canada since 1980. Several Canadian provinces have enacted
high-cost credit legislation, which imposes additional disclosure and licensing requirements for
lenders, although these regulations are not designed to limit consumer access to credit.

GROWTH STRATEGY
The company's four strategic pillars are focused on developing a diverse range of credit products,
expanding its channels and distribution points, diversifying its geographic presence, and finally,
improving customer financial well-being through its products, prices, tools, auxiliary services,
and customer service. Relations.

Develop a wide range of credit products

Currently, Goeasy provides typical unsecured installment loans, home equity-secured installment
loans, motor vehicle financing, and loans to fund the purchase of retail goods, sports and
recreational vehicles, home renovation products and services, and health care.

The company's vision is to create a comprehensive suite of subprime consumer lending products.
Credit cards, lines of credit, and other credit-building products, such as cash-secured credit, may
be introduced in the future.

Expand their channels and distribution points

The Company operates three distinct and complementary procurement and distribution channels,
which include 411 retail loan outlets (291 Easyfinancial branches and 120 Easyhome stores where
loans are offered), its online platform, and point-of-sale financing via approximately 4,000 dealers
and business partners.

As Goeasy seeks innovative ways to make loans more accessible to its consumers, expanding its
distribution channels is a key strategic focus. The company will continue to seek new
opportunities, such as expanding its retail network, creating a more dynamic and personalized
digital experience supported by mobile devices, opening new auto and power sports dealerships,
forming new business partnerships, and pursuing new referral associations and third-party loans.

The point-of-sale market continues to be an attractive opportunity, as consumers are inclined to

spread payments over time through a buy now, pay later model. This opportunity and the lack of
supply of financing in Canada were key in driving the Company's partnership with PayBright in
2019, now Affirm, and its acquisition of LendCare. In addition, this channel generates a new
source of customer acquisition for the company.

Geographic Expansion

Goeasy anticipates expanding to around 300 - 325 Easyfinancial locations in Canada, with a focus
on Quebec. Furthermore, the corporation intends to grow in markets such as the United States and
the United Kingdom. It is estimated that there are more than 100 million subprime consumers in
the United States and more than 12 million subprime consumers in the United Kingdom. In these
markets, consumers use credit products such as those provided by Goeasy. Currently, the
company is looking at possible acquisitions in both Canada and these other markets.

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Financial Security

Goeasy is committed to its clients' financial well-being and to providing them with a way to repair
their credit and regain access to preferential lending rates (1 in 3). As the company evolves, its
array of goods and services must be structured to fulfill the demands of its clients across the credit
spectrum.

Goeasy’s predictions for the following years are as follows:

Source: Goeasy Presentation

Therefore, considering the loan portfolio that the company will have in 2024 ($3.5b), at an
average interest rate of 35%, with an operating margin of 37%, a 2x debt/equity leverage with a
rate of average interest of 5%, a tax rate of 25% and maintaining the number of shares we would
reach an EPS in 2024 of $15 - $16.

To achieve these goals, Goeasy has to meet the following key assumptions:

• The company needs to execute the growth initiatives outlined in its strategic plan,
including expansion of credit products, geographic expansion in Canada, and increased
penetration of its risk-adjusted products, indirect outlets, secured loan products, and credit
products. of home loans
• Continued growth of the consumer loan receivable portfolio, driven by new delivery
channels, further geographic expansion, and continued growth of the company's existing
loan products.
• The company must continue to have access to growth capital at a reasonable cost

Due to a shift in product mix, increasing use of risk-adjusted pricing within the portfolio,
expansion in indirect point-of-sale financing, secured loan products, and higher use of risk-
adjusted pricing within the portfolio, the business anticipates performance to decrease. Greater
lending activity in provinces with lower interest rate loans.

The estimates do not include any mergers or acquisitions, and default rates for secured and risk-
adjusted loan products continue to develop in line with the Company's expectations.

FINANCIAL ANALYSIS

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Over the last five years, the company's net income to shareholders has increased at a CAGR of
25%. Revenues have grown at a CAGR of 12.8% since 2001, the most aggressive increase since
the inception of easyfinancial.

Source: Goeasy Presentation

Their dividend growth is the next intriguing feature. Goeasy’s current annualized dividend is
$3.14 per share, representing a 2.82% yield. The dividend was $0.34 per share just 7 years ago.
It has a 5-year dividend CAGR of 30%, a payout rate of only 25.4%, and future growth potential.
It shows no indications of slowing down.

The company's rapid growth is because it reinvests nearly all its profits back into the firm. Goeasy
has an average ROE of 25%, thus after deducting the dividend, the remaining 65% is reinvested
in the firm. As a result, value is created, making $GSY a high-quality compounder

It currently holds an S&P BB- rating with a stable trend and a Moody's Ba3 rating with a stable
trend. The corporation has issued a new $550 bond with an interest rate of less than 5%. Adding
all this together, the business has stated that it has enough liquidity to finance organic expansion
until the third quarter of 2023.

The following photograph demonstrates the company's excellent quality. Operating margins have
improved by 38% in just 5 years because of the scale it has achieved. In the same period, the
profit per share increased by more than seven times.

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Source: TIKR

Company financing is currently $1.3 billion: $900 million in refinanced bonds due in 2024 and a
$270 million loan refinanced in 2023.

Source: Goeasy Presentation

MANAGEMENT
Insiders control 26% of the stock. Because they control a substantial portion of the company, it is
evident that they are linked with the shareholders and believe in it. Donald Johnson, who served
as chairman of the board from 2000 to 2018, owned a whopping 20.33% of the company.

David Ingram, the current executive chairman and former CEO from 2001 to 2018, is the next
largest stakeholder. The current CEO owns only 0.52% of the company, or around C$5.4 million,
which isn't much but it should be sufficient to make good decisions for the shareholders.

The management team receives the highest compensation if the company consistently achieves a
CAGR in EPS of 30%. This is very appealing in a financial firm since it incentivizes the
management team to see the benefit per action grow, which is a key variable in the increase of
the stock price.

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RISKS
Changes in the legislation governing the Company's products: since 1980, the regulator has
limited the maximum nominal interest rate to 60%. Goeasy often charges 40%. Currently,
additional provincial laws focusing on high-cost credit loans have been implemented in some
geographic areas but have no meaningful influence on the Company's commercial operations.

Goeasy works with provincial and federal agencies independently and through the Canadian
Association of Lenders. Throughout the legislative process, the company has been approached
regularly to provide direction and feedback on how rules might be tailored to better protect
consumers while limiting their access to credit and maintaining market efficiency.

To modify the law, a congressman must propose it, but it must then be approved by several other
institutions. It has been proposed before, but it has not been accepted by all entities. Only once
has progress been made, when it was proposed to reduce the maximum rate of interest from 60%
to 45%, but it never came to fruition. Even if this were to happen, it would not affect Goeasy.

A material increase in morosity levels. As previously stated, a crisis raises the rate of
unemployment, but this is offset by a higher rate of interest on loans, an increase in the number
of customers, and a reduction in advertising costs to attract customers.

VALUATION
Due to the negative reputation produced by the 2008 financial crisis, the financial industry is
currently one of the few industries that stays with low valuations, thus we will see that in absolute
terms, the vast majority of comparables are relatively "cheap." It is presently trading at $115
Canadian, which equates to a PE '22 of 8.5x and a P/BV'22 of 2.3x.

Goeasy is valued by Book Value or EPS because it is a financial company. A financial company
with an ROE as high as Goeasy's should trade at around 4x BV. The historical average at which
it has traded is between 2x - 3.5x BV.

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Source: TIKR

In terms of future EPS value, we can observe that the average that has been stated has been around
10x EPS. If it weren't for the stigma associated with subprime lending a firm with Goeasy's
growth would be trading at much higher multiples.

Source: TIKR

We can observe some of the most similar firms to Goeasy and their past prices:

SUS (S&U), an English subprime auto loan company with 5% yearly growth and 15% ROE, has
traded at 12x PE and 1.8x BV on average.

CACC (Credit Acceptance) is an automobile lending company in the United States that has
similar growth (22%) and ROE (30%) as Goeasy. In recent years, its average price has been PE
13x and 4x BV.

RM (Regional Management) grows at the same rate as Goeasy (28%) and has a slightly lower
ROE (15%), but it is a smaller company with a capitalization of $400M and trades at lower
multiples.

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The company can continue to expand at a perfect rate of 20% in the next years, resulting in a total
sales increase of 30%. Margins are computed at 34% but may increase as the company grows.
There will be no dilution; on the contrary, the corporation understands how to manage share
buybacks and issuances. As a result, the total number of potential shares would be roughly 15
million. The company is likely to maintain its debt-to-equity ratio, which is below its maximum
and results in less than 2x equity.

The stock is now priced at C$111, implying a PE of about 8.48x by 2022. Following a proposed
normalized scenario and using a PE of 12x and a P/B of 3x (added to an ROE of 25-30%), the
company offers a value of C$420 in 2025. This equates to a 25% TIR after five years.

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