The chair and joint chief executives of small business lender Prospa were contrite at the company’s annual general meeting last week, offering apologies for the company’s failure to meet prospectus forecasts. Now, the questions for investors are when the company will recover from the big sell-off it has suffered and whether it will return to be a highly rated growth stock.
The company, which claims to be Australia’s number one online small business lender, was listed on the ASX in June, after raising $109.6 million at $3.78 a share. The stock price went as high as $4.96 in September but following the release of the trading update on November 18, the stock fell to $2.10. It finished last week at $1.98.
Macquarie Securities has followed Prospa since it was listed. At one stage it had a price target of $5.25 on the stock but in its most recent note to clients, it has cut its valuation (based on discounted cash flow analysis) and its 12-month price target to $3.
Macquarie says it cut its earnings and target price forecasts to reflect the uncertainty the company has created. Its estimate for 2020/21 earnings is down 47 per cent and for 2021/22 it is down 24 per cent.
The company’s trading update said it expected revenue for the 12 months to the end of December to fall short of the prospectus forecast by 8 per cent.
The company said it expected 2019 loan originations to be a little ahead of prospectus forecast and explained the revenue shortfall as a function of the “premiumisation” of its book.
This means the company is doing more lending to borrowers with higher credit scores and, as a result, the overall interest rate it earns, as well as the intertest margin, is lower.
The company said the margin decline would be offset, to some extent, by a reduction in loan impairments, which are expected fall from 10.2 per cent of average gross loans to 8.1 per cent.
The prospectus forecast was for calendar year 2019 EBITDA of $10.6 million, which was cut to $4 million in the trading update.
At last week’s AGM, Prospa chair Gail Pemberton said: “We owe shareholders an apology. While we believe we have the right strategy to drive the best long-term value for shareholders, the board is disappointed in the performance of management in the first half.”
Joint CEOs Greg Moshal and Beau Bertoli provided a more detailed explanation of the premiumisation strategy. They say: “Our strategy involves attracting better credit quality customers. These premium risk grade customers have three main benefits:
- we see this revenue as less risky as the probability of default is usually significantly lower;
- lower impairments can lead to improved funding costs and funding diversity; and
- in the long term we believe these customer segments should have higher lifetime value as they typically trade for longer, are larger businesses and are more likely to take up recurring revenue products like our new line of credit.
“Our revenue is sensitive to a lower rate card because our loan product is shorter in term and we charge a fixed interest rate. This means small movements in rate or term can generate a greater impact than in longer term or variable rate products.”
Moshal and Bertoli say premiumisation was always part of their plans and it was able to introduce a new rate card that is receiving new funding from a major Australian bank that reduced funding costs.
They say the impact on revenue is greater than expected because there is a strong take-up of the new rate card.
Macquarie says the positive for the company is that it has strong growth in originations. It believes the company’s guidance may be on the conservative side but says “more certainty is needed and confidence will take time to restore.”