Investment bankers Eight Capital launched coverage on Wednesday on fintech company Propel Holdings (Propel Holdings Stock Quote, Charts, News, Analysts, Financials TSX:PRL), with analyst Adhir Kadve saying there’s strong and profitable growth ahead and a potentially key re-rating catalyst.
Toronto-based Propel has an online lending platform which uses artificial intelligence and machine learnings to facilitate the origination of loans and lines of credit. The company focuses on underserved non-prime consumers, and while historically a US-only company (it facilitates access to credit in 27 states through its Credit Fresh and MoneyKey brands), Propel announced this past November its entry into the Canadian market through new brand Fora, an open-ended line of credit product currently available in Ontario, Alberta and BC.
Kadve said he likes Propel’s plan to reduce the credit risk profile of its loan book by expanding its addressable market to include customers with overall lower credit risk and increasing lending to existing customers and graduating many of those customers to lower interest rate products.
Kadve said, “Ultimately, as these initiatives work their way through the loan book (all initiatives have a lagging effect of between 3-6 months), we believe that charge-offs and provisions should trend more favourably, thus leading to profitable growth for Propel.”
As for the unsecured personal loan market, Kadve said fintechs, through the ongoing digitization of loan originations, continue to increase their share of the market, giving Propel, which has a sub-one per cent penetration of that market, a “strong tailwind and a long runway for growth.”
On top of that, Kadve there’s a potentially significant catalyst in Propel’s signing this past October of a five-year agreement with Pathward Financial, a large fintech-focused bank. The agreement will see Propel’s technology infrastructure and AI decision engine used to advance loans to customers of Pathward’s partner network.
“Through the partnership, Propel will take no balance sheet risk but rather earn a high margin and recurring monthly fee on each active user and an underwriting fee on originations. In our view, the absence of balance sheet risk and the re-occurring nature of the fees will allow investors to treat this segment similarly to SaaS-based revenues as opposed to lending-based revenues, hence the re-rating potential,” Kadve wrote.
On Propel’s financials, Kadve is forecasting revenue to go from $226.9 million in 2022 to $322.3 million in 2023 and to $423.4 million in 2024. Adjusted EBITDA is projected to go from $40.8 million in 2022 to $86.3 million in 2023 and to $122.4 million in 2024. (All figures in US dollars except where noted otherwise.)
On valuation, Kadve said Propel is currently trading at 3.4x 2024 Price/Earnings, which represents a significant discount to its peer non-prime lending company group at 5.6x. Kadve launched on Propel with a “Buy” rating and C$15.00 target, based on a 7.0x 2024 P/E multiple and implying a one-year return at the time of publication of 115 per cent.
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