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Earlypay

21 May 2024

Matthew Macreadie

The Earlypay credit story has improved significantly following the associated resolution of RevRoof process, lower credit impairments (through operational changes), and an optimised funding base. In testament to the company’s “executing on what it says it will” approach these strategic initiatives have heavily derisked the credit over the past six months.

Going through these changes individually:

  • Resolution of RevRoof– On 11 December 2023, EPY announced the resolution of RevRoof recovery process with an A$8.4m cash from business sale released to EPY. In total, EPY incurred a A$10.5m credit loss and approximately A$4.7m of recovery related expense (A$0.8m incurred in H1’24)
  • Completed Invoice Finance (IF)/Trade Finance (TF) Warehouse Refinancing – On 14 February 2024, settled (funds drawn) on the new single IF/TF warehouse facility with a senior commitment limit of A$220m. The expected reduction in the overall cost of funds is c.1.0% compared to the previous invoice and trade facilities. The refinancing of the Equipment Finance (EF) facility is being reviewed with a cost/benefit analysis to determine financial advantages.
  • Operations – Strengthening of corporate governance, and practices around credit underwriting, documentation & settlements, client, and risk management. This sharp focus will relate in Opex savings from technology, data, and improved processes.

 

These positive structural changes have also been accompanied by solid operational performance which has flowed through to the reported H1’24 results.

The balance sheet is looking strong with a Net Tangible Asset (NTA) position of A$42.9m and a cash position of A$56.2m as of H1’24. In relation to funding, there will be considerable financial and operational benefits to follow in H2’24.

The EPY Holdco bonds have two key covenants – issuer to maintain an EBITDA/Interest Cover ≥ 2.0x and a minimum cash balance requirement of AUD15m or half the outstanding note’s amount. These covenants are in place to provide bondholders protection and comply as of the last reporting date.

Following the acquisition of Timelio and new warehouse refinancing, EPY expects to have c.A$10m of cash available for corporate management initiatives, nothing that currently part of the corporate bond is notionally funding the Mezzanine tranche for the new warehouse. The board will consider EPS accretive capital management activities that may include bolt-on acquisitions, repayment of corporate debt and/or on market buy back. Irrespective of whether the corporate debt is repaid (i.e. EPY Holdco) early or not, our credit story remains solid. The underlying business has remained profitable, cash generative and with a strong balance sheet. EPY expects a return to profitability in FY24F and further improvement in FY25F as illustrated below.

Since 2012, EPY has become a leading provider of business funding solutions to Australian SME businesses. Invoice Finance is EPY’s core product, with supporting Equipment & Trade Finance providing a compelling value proposition to clients in the SME market.

  • Invoice Finance (66% of H1’24 revenue): business line of credit supported by unpaid invoices;
  • Equipment Finance (26% of H1’24 revenue): vehicle, business equipment and machinery financing; and
  • Trade Finance (9% of H1’24 revenue): offered in conjunction with invoice finance facilities to allow businesses to purchase goods from suppliers.

EPY targets the estimated 35% of SME’s in Australia that operate in the B2B marketplace and service a diverse portfolio of over 3,000 clients across all products, with loan sizes ranging from A$50k up to A$10m. Invoice & Trade Finance clients on variable rate contracts with EPY have the ability to amend customer rates in response to market conditions and competition. EPY’s average current loan portfolio totals to c.A$273m in December 2023.

Client sectors include:

Key Points

  • The Earlypay credit story has improved significantly following the associated resolution of RevRoof process, lower credit impairments (through operational changes), and an optimised funding base.
  • We see excellent value in the EPY HoldCo bonds versus the HY opportunity set for a short-term (for 1.5 years, holding period – December 2025 maturity). Clients can pick up the EPY HoldCo bonds at $96 / c14% yield the bonds offer a considerable pickup versus AUD HY comps (see below).
  • The subordinated notes will pay interest on a quarterly basis at a floating rate of 90 day BBSW + 6.50% p.a. At the current 90 day BBSW of 4.37%, the interest payment would equal 10.87% p.a.
  • Irrespective of whether the corporate debt is repaid (i.e. EPY Holdco) early or not, our credit story or call remains solid. The underlying business has remained profitable, cash generative and with a strong balance sheet. EPY expects a return to profitability in FY24F and further improvement in FY25F.
  • We have attached the initial credit opinion accompanying the EPY Holdco issue back in November 2021.