CURO Summary
CURO is in the nondepository credit institutions industry providing below loan products and brands in US, UK, CA to subprime borrows.
Investment Thesis
- Market too cheaply priced Katapult deal due to tax and SPAC redemption concerns
- Stock price performed 20%-40% to the down side comparing to lesser peers, possibly due to technical or unsavvy traders ignored katapult deal, or only compared with price and regular pe/pb.
- Fundamentally strong with bad 2021 Q1 credit condition and stimulus already priced in
- CURO management actively looking for more mergers
CURO brands
- Speedy cash
- Rapid cash
- Avio credit
- Wage day advance
- Juo loans
- Katapult
CURO consumer finance products
- unsecured installment loan
- secured installment loan
- Open end loan
- single pay loan
CURO risk fators
- subprime borrower credit rating
- delinquency rate
- loan loss provision
- loan origination volume
- regulatory policies on credit rate and who can borrow
https://www.ft.com/content/d2b62fc8-b759-4ab5-9067-16db399b0232www.ft.com
- 43% equity stake in Katapult if FSRV SPAC drops below trust value ($13.8 vs $10)
- rising yields expands profit margin
- Senate Democrats passed $1.9 Trillion Covid-19 relief plan on Saturday 3/6/2021. This could potential harm the stock by reducing loan demand. (*Not necessarily bad since people’s spending behavior has changed to faster-spending)
YTD CURO stock price:
Katapult deal homerun
Very low redemption % is predicted in above scenario analysis.
This non operating profit is never recognized in CURO’s income statement
Deal will be closed first half 2021
This 337M USD after tax profit is not reflected in retained income
Around SPAC merger announcement date, we can see the stock price jump by exactly $8. (The red+green line is CURO, the purple line is FSRV — the Katapult SPAC ticker.)
It is also very interesting right now to pair trade CURO and FSRV before the deal close.
Then comparing with the closest publicly traded competitors shown in annual report and financial times:
https://www.ft.com/content/d2b62fc8-b759-4ab5-9067-16db399b0232www.ft.com
Analysis
2020 Q4 CURO realized 100% return from $7 to $15; however after accommodating for the $8 per share profit from Katapult deal, the return was around 0% for CURO in Q4, which echoes with the lackluster eps deduction.
CURO 8% income rise due to below from Q4 earnings call:”
Moving to the final quarter of 2020, our results were impacted by three things. First, the previously mentioned increase in loan demand compared to the prior quarter; secondly, reduced quarantine and stay at home orders; and finally, continued historically low delinquencies and net charge-off rates
“
I also adjusted $164M non operating bargain purchase out of ENVA’s 2020 Q4 stock return.
CURO’s PE and PB ratio should be cut to half which pretty much aligns with industry. High Debt to equity ratio is not a problem since they are expanding like recent purchase of Flexiti with pure cash, which generates positive cashflow and all debt bought out. With the precedence of Katapult, there is more reason to belive in the management for this $85M investment. Moreover, current ratio of 4 is sufficient.
In the 2020 Q4 earning call CEO mentioned to only start evaluating the debt situation after Katapult closes in early Q2 2021.
Company has been steadily repurchasing shares until Q1 2020 when COVID happened, and before Katapult exploded.
CURO’s sector leading ROE and mere 14% of return since 2020 Q4 put it in a very undervalued position now with 20% short term upside.
quarterly eps (left most recent)
yearly eps (left most recent)
During mid 2020, CURO CEO Don Gayhardt mentioned people were busying paying off loans rather than making them, caused overall volume fell.
2020 yearly eps decline was due to:”
Putting together the pieces from a P&L perspective for the fourth quarter, we posted a revenue decline of 33.2% year-over-year primarily due to COVID-19’s impact on loan demand as well as the impact of California regulatory change that went into effect at the start of 2020. Adjusted EBITDA declined $33.2 million or 49.2%, while net revenue declined $39.8 million year-over-year. The net revenue decline was partially reduced by lower advertising costs as demand has returned slowly. While we did keep some of the cost reduction efforts in place in the fourth quarter as previously described, we incurred some additional variable compensation and strategic consulting expenses with an eye towards 2021 and forward. As a result adjusted EPS declined $0.20 per share for the fourth quarter.
“
2021 Q1 could still be under stress:”
While we exited 2020 with an upward trajectory for earning asset growth to the extent that the U.S. Congress passes additional stimulus measures as is widely anticipated, our U.S. loan balances could again contract in the first half of 2021 putting continued pressure on revenue and earnings levels for our U.S. business. However, this will also support our continued strong credit performance as well as our cash balances and liquidity.
“
So currently market has already priced in a lackluster 2021 Q1 revenue. But longer term in 2022ish with easing credit standards, risking demand when economy recovering from COVID, and rising interest rate to boost margin, EPS should be able to bounce back to pre-COVID before lots of write downs.
