I got a little sick of reading that it will take a 10 year...

I got a little sick of reading that it will take a 10 year payback period for IOU to break even on the IDSB investment so I did some hypothetical financial modelling of the investment to see what could happen after 10 years.

The two considerations:

1. Taking the IDSB PBT at $4m for the 10 year period would actually factor in no growth of IDSB revenue/income which would be an incorrect assumption given that they have as recently as 2020 signed a second funder in Affin Bank. IDSB expects the value of this fund to equal that of RHB Bank.

2. When a business invests in an asset, the method in which they pay for that asset is a good indication of how strongly they feel about it in terms of a return in the way of direct income or value added to the existing business. To put it simply, IOU management would not have invested $41.3m CASH in IDSB unless there was substantial upside. We always see acquisitions done in either part cash and part stock or all stock. Now the owners of IDSB may have been preferential to an all cash transaction but IOU management would have walked away unless they saw a benefit.

As we've been made aware, there is a significant cross selling opportunity for these businesses. Stating that IOU gets access to 30k customers is an incorrect finger. The 30k figure refers to active loans on the IDSB books. The customer number is actually over 50k as has been reported.

Please keep in mind that this is all hypothetical modelling with quite a few assumptions. The reason I have done this is because to some it’s difficult to understand the opportunity without a real example. Please consider this an example.

Below is an estimation of what could occur during the 10 year payback-period proposed.

Discussion: In the first year due to the MCO, IDSB won't return $4m as first predicted. Based on the 9 month figures in the September 4C it looks like they will come up short. This was discussed by IOU and there was some consideration given for the MCO disruptions. The PBT increase is what I have estimated the growth will be in each year. The first year increase will be the largest as the economy reopens. This will be followed by another large year and the years following will slowly decline to a rate of 3% per annum. I used this decline to illustrate that the growth doesn't need to be substantial for the return to be quite significant. As you can see by the year 10 the accumulated return will be well over the amount invested, achieving the first profit in the second half of the 8th year. By the 10th year IOU would have accumulated a profit of $17,619,584.

That's the income piece of the invested covered. Now let's look at the value add of the investment. This is the part of the asset that adds value to the existing IOU business; the BNPL cross selling opportunity.

Discussion: I’ve used the same 10 year period because we’re looking at how much value IDSB will provide as an acquisition over that time frame for arguments sake.

The percentage of onboarded IDSB customers is an estimation. The number of courses grows over time. For the spend amount I started off with the minimum spent in AUD which is $332. As this amount is considered low I’ve used a 3 month pay back period and repeated this in every quarter. Over the 10 years the spend amount remains the same however the number of times this amount is spent increases. This is similar to what we’ve seen with other BNPL companies. Maximum number of times this amount has been recycled during a per year period is 8. I believe this to be conservative however I’m open to feedback. I’m not getting paid to do this so I’ve not spent a great deal of time working it out.

After 10 years with the IDSB acquisition the accumulative revenue from the ISDB customers is $391,760,000. As these customers are considered high quality in terms of credit I’ve used a margin of 5% factoring in the funding warehouse agreement that will be in place over the 10 year period. The cumulative income is $19,588,000.

These BNPL figures are completely hypothetical and should be used as an idea of how the investment works within the IOU business model. We don’t know ongoing margins or the percentage of IDSB numbers onboarding.

Below are the combined totals of income from IDSB and BNPL revenue generated from onboarding IDSB customers used in my example.

Discussion: As you can see from this example with conservative numbers, by the 10 year mark, IOU won’t have just reached the break-even amount with the IDSB investment they will almost have a 100% ROI. The idea that IOU management has invested in something that will take 10 years to pay back does not take all aspects into account. Out of interest I expanded the time horizon to 20 years for the IDSB income and after that time at the same 3% growth Y-o-Y, IOU would have a cumulative return of $105,900,600 or 156% ROI. That may sound far-fetched but try and keep in mind that the loan term for IDSB is 10 years, meaning this would be two terms. How far-fetched is it really? The question you should ask yourself now is whether the $41.3m could have been used more effectively for other purposes. This is opinion only and should not be taken as investment advice.