Mogo Finance Technology has triple-digit upside, says M Partners

Mogo Finance Technology (Mogo Finance Technology Stock Quote, Chart, News: TSX:GO) is much more than a payday lender, and investors should take a long look at a company that has successfully transitioned its loan portfolio to a predominantly long term mix, says M Partners analyst Steven Salz.

In a research report to clients today, Salz initiated coverage of Mogo with a “Buy” rating and a one-year price target of $3.00, implying a return of 122 per cent at the time of publication.

Salz says there is a disconnect of information in Mogo’s story. He notes that the company began raising money aggressively in 2014, culminating with a IPO in June of last year when it raised $50-million at $10.00 a share.

Since that time, notes the analyst, the credit markets tightened, forcing Mogo to adopt a long-term approach. And while the markets viewed this shift as reactionary and a sign of weakness, Salz says the result is a company that has transitioned to the stability of a long term lender while retaining much of the upside of an online one. By way of example, he notes that Mogo’s technology driven underwriting process enables it to issue loans faster than traditional lenders.

“In our view, post IPO the stock traded down on a P/B basis as the actual business more closely reflected an online lender,” says the analyst. “Using a peer average 1.5x P/B ratio, Mogo was worth $2.59 per share at IPO. If Mogo’s strategy were to operate as a pure lender, they could do so profitably, cutting operating expenses by ~65%. It would then be more appropriate to value Mogo on a P/B or P/E basis. We aren’t advocating for an EV/Sales valuation, but do feel Mogo shouldn’t just be viewed as a traditional lender. The company is in a transitional period where they will be offering more than lending products, but it has yet to be reflected in the share price.”

Salz believes Mogo will post EBITDA of negative $2-million on revenue of $49-million in fiscal 2016. He expects these numbers to improve to positive EBITDA of $3-million on a topline of $55-million the following year.

The analyst says investors buying into Mogo now have limited downside.

“We believe there is embedded margin of safety in Mogo’s existing lending business assuming new product launches do not go as expected,” he says. “Mogo could reduce operating expenses by ~65% and become net income positive as a pure lender. This case meaningfully reduces the long term upside but also provides a floor of ~$2.50 that is above the current share price.”

Disclosure: Mogo is an annual sponsor of Cantech Letter.