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Earlypay FY22 Results

Earlypay (EPY) reported positive set of FY22 results which sets up a good base for FY23.

We are comfortable with the EPY holdco and EPY trade finance warehouse note transactions – both of which remain quality, floating-rate, credit investments that should perform well in the current interest rate environment. The EPY holdco notes are unsecured and pay a quarterly coupon of 3m BBSW+650 (currently ~9% based on current reference rate) with an expected maturity of December 2025. The EPY trade finance warehouse notes are secured and have class coupons listed below based on current reference rates.

EPY Trade Finance Warehouse

Source: Bloomberg

Coupon as of 5/10/2022

Note: all EPY trade finance portfolio parameters remain in compliance as of September 2022. The industry and top 5 customer pool parameters have Class C excess. Arrears > 30 days are below 8%. If investors would like an EPY trade finance portfolio parameter report, please speak to an IAM sales representative.

EPY continues to grow revenue and EBITDA off the back of the bigger loan book. Positively, revenue (excl Jobkeeper) and EBITDA increased by 26% and 30% respectively on FY21 driven by organic growth in the main invoice finance product. Operating margins continue to improve, demonstrating the scalability of EPY’s tech platform and business model. EPY generated positive net operating cashflow of AUD12.7mn for FY22 which bodes well for debt serviceability as net operating cashflow includes of finance costs of (AUD9.6mn).

The business was boosted by strong loan growth in invoice/trade financing with volumes finishing the year at AUD2.4bn (or up 29% on FY21). Primary drivers were the strong economic demand (post lockdowns) and higher inflation adding to total transaction volume (TTV) (that is, as invoice value rises from clients lifting prices). Furthermore, the end of the federal government loan guarantee program (30/06/22) has resulted in less credit being available for SMEs.

EPY also achieved solid equipment finance growth of AUD132.5mn (up 40% on FY21). The business has made a conscious decision to slow growth in this segment and focus on margins and cross-sell across trade finance. Margins are significantly higher in trade finance vs invoice/equipment finance respectively and this provides a source of competitive advantage. EPY now has over 3,000 SME clients, of which 450 use trade/invoice finance.

Bad debts have been well managed over the year. Historically, EPY has had low loss rates (default rate of <0.1%). Note, all lending at EPY is secured and asset backed which protects the company against from incurring any losses.

EPY’s business model is built to pass on rising interest rates for invoice/trade finance customers and hedge equipment finance interest rates. EPY maintains a series of finance warehouses and facilities across a series of providers to reduce funding risk and maintain a competitive funding position. In April 2022, EPY set up a trade finance warehouse vehicle to fund newly established trade finance loans. The warehouse facility was for AUD30mn, including AUD22.5mn (Class A) and AUD3.75mn (Class B). This has created additional capacity to grow the trade finance product. EPY issued a new 4 year corporate bond at sub-7% in November 2021 and repaid a AUD20mn corporate bond that matured in May 2022.

EPY’s balance sheet remains strong with debt to assets sitting at 59.5% (borrowings = AUD293.1mn / assets = AUD492.8mn). This level has risen on FY21 (borrowings = AUD206.3mn / assets = AUD375.7mn) partly due to the increased utilisation of warehouse facilities to support growth in loan book. While leverage metrics are high, the business is generating solid EBITDA which will allow it to deleverage (if needed). Furthermore, the business has other levers it could pull to retain cashflow including withholding a dividend, which would add circa AUD7mn in cash, or utilising existing cash on balance sheet (AUD52.7mn).

Source: Earlypay

EPY provides secured finance to SMEs. The three main product lines are invoice finance, trade finance (in conjunction with invoice finance) and equipment finance. Trade finance is offered in conjunction with invoice finance to customers importing products from overseas. All lending at EPY is secured and asset backed. Invoice/trade finance is provided on modest LVR and is short-term in nature. EPY has a long history of supporting SME’s in all stages of the business life-cycle and has an experienced team to manage advance rates or collect-out if trading conditions deteriorate. Equipment finance is generally offered only against assets with a good resale market and EPY has an experienced internal and external team to successfully manage recoveries if required. Arrears remain very low, with less than 0.5% over 30 days. EPY was previously named CML and was originally formed in the early 2000s.

Financials – ASX (Profit & Loss and Balance Sheet)

Source: Earlypay

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