pgl

Prospa (PGL:ASX)

Market capitalisation: $291 million
Analysts’ consensus valuation: $3.05 (FN Arena)
After its first listing attempt was pulled at the last minute in June 2018, amid concerns from the Australian Securities and Investments Commission (ASIC), small-business specialist lender Prospa got away second time around, in June, jumping 19% on its debut, after being priced at $3.78. By September the stock had pushed almost to $5, but Prospa hit the skids in November, slumping 28% after releasing an earnings update that the market saw as disastrous.
Prospa told investors that its earnings and revenue for (calendar-year) 2019 and the first half of 2020 would be below its prospectus forecasts – in fact, it would fall short of its June 2020 earnings forecast (that is, EBITDA, or earnings before interest, tax, depreciation and amortisation) by more than 60%. (Net profit is not expected until FY21.) The shares almost halved in price in four trading days.
The company attributed this to higher-than-expected costs, amid a chase for premium (that is, better credit quality) customers. Loan originations for CY19 are expected to be ahead of prospectus forecasts, but while this sounds better for the business, the revenue suffers if more loans are to premium customers, because they pay lower interest rates. The better-quality loans do mean lower loan impairments, however.
In reaction to the November update, the company’s board cut bonuses for executives and demanded improved processes and controls be put in place around lending, forecasting and expenses.
What we have now is a company that has a great business opportunity – to improve the access to finance for the 2.8 million small businesses in Australia and New Zealand, and to use “fintech” and its credit assessment skills to lend profitably. For investors, this business opportunity is now priced much more favourably than it had been. The price “haircut” applied by the stock market has been brutal on float subscribers, but could present a bargain for new investors. Even after the downgrade, analysts hold bullish price targets for Prospa – Macquarie sees $3, while UBS posts $3.10 – but bear in mind that these firms were the joint lead-managers for Prospa’s float.