I've been following BeforePay since its IPO as I believe the unit economics of its business model are very attractive. The 5% fee on a 1 month average loan means they are able to earn a 60% APR. Because they have a high ratio of repeat customers they can curate a high quality customer base over time. i.e. if users don't repay then you cut them off the service, but to reliable users who demonstrate creditworthiness then you can continue extending credit and progressively increase the loan size.
High repayment rates on loans is further helped by the fact loans are offered against accrued income from employment and automatically debited from the users' account, and the short duration and small average size of the loans.
I also respect the management team and believe they are high quality, which is especially impressive for such a small company.
However, I have some concerns which I would be interested in other investors' perspectives on;
1) The topline momentum of the business is slowing markedly. The YoY growth rates that B4P are reporting look good, but when you look at the growth sequentially it reveals a serious stagnation in the topline. Pay advances have stagnated over the past three quarters, and the rate of growth on active users is slowing.
The business is too small to support its operating costs. BeforePay needs to hit critical mass otherwise this business won't amount to anything irrespective of how good the potential unit economics could be.
I also note that on a per user basis a decline in the frequency of advances per user and the average size of advance per user... which suggest declining user engagement.
Source: Company Data, my model 2) I went back to review the prospectus and learnt that a whopping 25% of the shares outstanding are subject to escrow arrangements which all have the same cliff date. The shares mainly belong to the two co-founders, Tarek Ayoub and Guo Fang Mao. They were very clever entrepreneurs and saw a great opportunity to launch a fintech when there was huge investor demand for these type of companies, and to their credit they successfully got it to market and have done very well for themselves in the process. However, they have left the business entirely, and both left their board positions. Are they going to be long-term investors in this high-risk company, or after already seeing their paper wealth plummet will they look to cash out whilst their investment is still worth something? My sense is the latter given they have exited BeforePay and have left BeforePay's board.
Company ProspectusWith the end of the escrow period fast approaching on the 17th of January 2024, I am worried that this could put large selling pressure on the B4P stock. I've seen these large sell-downs happen many times and the selling pressure can flood the market with stock and you need a lot of interested buyers on the other side to absorb that selling pressure. The selling pressure can really make these stocks fall hard and you don't want to be in the stock when this happens.
In BeforePay's case, I am particularly concerned as the stock is very illiquid so any selling pressure from the escrowed shareholders could seriously drive down the share price.
2023 Annual Report
Below, I have a graph of the BeforePay share price and volume of shares trades overlayed at the bottom. In the past 3 months the B4P stock has traded less than a million shares... and there's 11.6m shares to come out of escrow on the 17th of January 2024. How on earth is the market going to absorb the selling pressure that comes if the founders sell down?
NabTrade
In summary, on a very long-term basis I believe this company has strong potential if they can fix the stagnating top-line given the attractive unit economics of the business model, and high quality management team. However, I see severe downside risk to the share price in the near-term given declining user engagement and the significant overhang of the upcoming end of escrow in January for 25% of the shares outstanding.
I will continue to watch BeforePay very closely, and at the right price would like to be a long-term shareholder in this company. However, I think I foresee a severe selldown and think that I will be able to buy in at much better prices in the coming months.
Happy to discuss my views above and would love to hear other peoples' opinions to learn more about this company.
