Yet Another Value Podcast - Jon Cukiewar lays out the goeasy thesis $GSY $EHMEF

Episode Date: September 1, 2021

Jon Cukiewar, Founder of Sohra Peak Capital, discusses his ivnestment thesis for goeasy (in Canada under $GSY; in U.S. under $EHMEF). Jon does a deep dive into the company's history before explaining how they can get such great returns and why he sees continued strong growth in their future.Jon's twitter: https://twitter.com/JonCukierwarSohra Peak's website: https://www.sohrapeakcapital.com/disclaimer Chapters0:00 Intro1:40 goeasy overview and background15:00 Discussing goeasy's valuation versus U.S. peers18:15 How can goeasy consistently get over 20% returns on equity28:40 goeasy's strong capital allocation30:45 Why is goeasy paying a dividend?35:55 How do goeasy's borrowers perform when the economy takes a turn?38:35 Regulatory environment and concerns43:15 What's goeasy's advantage as they move into new lending niches?44:45 Revisiting valuation / how does this outperform going forward?55:25 Discussing the lendcare acquisition59;40 Jon's closing thoughts

Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have John Suki War. Did I get it? You got it right. You nailed it. Got it right. John is the founder of So, damn it. Sohar Peak Capital. What is it? Sora Peak Capital. You're just really testing. Anyone who's listened to me for a while knows I'm not great up pronunciation and you are just really testing all of it. But John, how's it going, man? Oh, it's going great, Andrew. Thanks so much for having me on. Really appreciate the time. Hey, look, I appreciate you coming on. And let me start this podcast the way I do every podcast. First, I'm going to give a disclaimer. Nothing on this podcast is investing advice.

We're going to be talking about a Canadian stock today, about a $3 billion market cap company. But, you know, Canadian stock, there are some regulatory risks here. So everybody should just remember a little bit of extra risk for domestic listeners. Please do your own due diligence. Nothing on here is investing advice. And then the second way I started a podcast is with a pitch for you, my guest, you know, we've chatted a few times. I found you to be very sharp. I'm really excited for our listeners to get it.

But I think the best feedback I can give you is you just started your firm, we'll call it. But I know some people who knew you in a prior life. I kind of did some due diligence on you. And all of them spoke extremely highly of you. So, you know, I'm sure the fund is going to be a great success. But we've got great background checks. I find you to be sharp. So I think our listeners are really going to enjoy this one.

So they can look back on this pot and say, They heard the first interview with you before you hit a pig. So that out the way, let's turn to the company we're going to talk about today. This is a Canadian company. The company is GoEasy. They trade under the symbol GSY up in Canada. And I'll just flip it over to you. John, what's so attractive about GoEasy?

Yeah, thanks, Andrew. So GoEasy. It's one of my favorite holdings. And, you know, disclaimer, I am long the position. And as Andrew said, do your own due diligence. It's one of my favorite companies. And I'm very happy to give, you know, the full rundown. a background of the company, their story, kind of a run through of their products, their

customers, you know, some of their key competitive advantages, the addressable market that they're targeting, which is quite large, and kind of the vision of, you know, what the future is going to hold for this company. And it's a very long-term thesis. So, you know, we're talking, these operators can probably continue compounding this company for many years, if not at least a decade. So, you know, let me start kind of an overview, as you mentioned, $3 billion company trading in Canada at Toronto Stock Exchange. And, you know, they've had kind of a very good run over the past decade. They have compounded earnings per share at about 30% since 2011. I'm laughing because John says good run. I was telling them before the podcast, I had some

random notes and they, you know, they're like a, what, 15x over the past 10 years and I have some random notes when they were 10x ago. So good run might be a little overstatement, but sorry to jump in. Please go ahead. So quite a good run. I think from If you take like the very, very lows in the early 2000s, it's maybe closer to 100x. Don't quote me on that. So anyway, they've had a good wrong, you know, operating margins have expanded from 8% to 33%. And, you know, so the story begins back in 1990, RTO enterprises, totally different business than what it was today. They were founded and it was a mixture and variety of rent to own businesses.

So you think like errands, you think, you know, rent a center, these furniture companies where you go in and you can rent a piece of furniture and you pay pretty high interest rates on it and you have the option at the end to buy the furniture or after a certain amount of time, you can give it back. So they operated like a mixture of those brands. At some point, like I think in the early 2000s, around 2001, they consolidated that into their strongest brand called Easy Home, right? And they re-titled the company called Easy Home in 2001. Now, around 2000, there was the current chairman, Don Johnson, he took over as chairman of the company. And he hired at the time the CEO at the time called David Ingram. He's now also, you know, one of the chairman and we'll get into the progression. And so David Ingram took over his CEO around 2001. And so he operated this business, this easy home business. And, you know, he was opening more branches. He was organically growing the company. And then, you know, something very interesting happened in the industry and which paved the way for GoEy's

and, you know, a few other competitors, but, you know, mainly go easy, is capitalized the most to really achieve the success they had today. So in 2008, the great financial crisis happened. We all know. So specific to this industry, in Canada, there were three giants leading up to the great financial crisis who were operating in the installment lending space, which means, you know, they have branches and consumers come in, non-prime consumers, and they say, hey, I need a loan, but I have prime credit, you know, I'm willing to take, you know, hundreds or a few thousand dollars at, you know, a slightly higher interest rate, higher interest rate than most people would pay. And they say, okay. So this business goes back all the way to the 1920s, right? I think HSBC and Wells Fargo have

their roots many, many years back. So they've been building their books of businesses for up to 100 years, right? There's HSBC, Wells Fargo, City Financial. And, you know, they have, I think, in total, at least a few hundred branches, each of them, the average loan size of the branch is over $10 million. Now, the great financial crisis happens. And, you know, there was a combination of two things, right? One, there was new Basel three requirements. And these banks now had to, you know, have certain requirements for the assets that they have in their balance sheets, right? And these loans, because of the way they were classified and classified as risky and they need to hold more reserves, that puts some pressure. And then, you know, the other bigger point

was from a PR standpoint, these banks were just deemed culpable and responsible for blowing up the global financial system. It was because of non-prime mortgages. And now here they are in Canada with a total of $3 billion of loans to these non-prime people. And it just was not a good look. So these banks said, you know what? We have billions, trillions of dollars dispersed elsewhere. we're going to wind down these businesses. It's a $3 billion book. So HSBC wound down and ran off their entire book. They shut down their branches. They sold their loans. Wells Fargo did the same exact thing over the span of about two to three years. And city financial, they did a combination of a runoff and then they sold their remaining book, the remaining assets in 2016, which is now

called Fairstone. And they're kind of the other big competitor in the industry. And so going back to Go Easy, at the time was called Easy Home, their CEO, he saw this opportunity and he saw, wow. So there was a 100-year-old industry that suddenly, like overnight of the span of one or two years, you know, just disappear. But the thing is, these customers, and I'll get to it in a second of who exactly these customers are, these customers still have high demand for this product and they need to go somewhere for these loans. So he decided in 2011, he opened up, he'd been operating the product kind of tinkering for a few years in the Easy Home Branches. In 2011, he opened up the first dedicated Easy Financial branch. And so Easy Financial just very quickly, like they offered

unsecured loans to people with non-prime credit, people who have credit that's not quite prime, so they're not good enough to go to a bank and traditional sources to get their loans. But they're better than subprime and deep subprime, so they don't want to go to a payday lender and pay 300%, 500% APR for a loan. And also, petty lenders typically have loans under $1,000. These people might need up to, you know, $5,000, $6,000, $10,000. So anyway, this niche still existed and, you know, Easy Financial was born. And so Easy Financial, they rolled out, you know, one branch, they rolled out a handful of branches. They were seeing remarkable success early on. And then another thing happened. And this, I really give credit to, you know, to David Ingram and

And Don Johnson, the two current chairman, and he was CEO at the time, David Ingram, was they went to the company and they went to the board of directors. They said, look, this easy financial product, we think this is the future of the business. We need to go down this direction. And the rest of the board of directors said, no, we don't, you know, you want to kind of lever up this business and you want to open your branches and you want to explore in this territory. We've had this other business that we've been running for over 20 years. And so the end result was that the only backing that the CEO got was from the chairman. So the chairman and the CEO together, they stuck their ground, they held their ground, and the rest of the board resigned. So the entire, the rest of the board, look it up. There was one other one board member who stuck with them, the chairman, the CEO, but the other five out of eight, they resigned. They just had to it. If I can just jump in, I mean, obviously hindsight 2020, the strategy was completely

successful, but it's funny to say that because GSY has had a short thesis out there that's pretty wrong. I would say the share of price, you know, who knows, maybe it's something bad. happens was proof. But if I was just looking at this from the outside and I saw a company where five of the eight directors resigned in protest of a strategy, I mean, I can't, you know, I'd be, I'd be, I don't short much anymore because memes thoughts and everything, but that would be the biggest red flag. And it's just, it's just such a cool story. But continue. Yeah, can you imagine the post on Twitter, you know, like from some of the big charts? Yeah. So, so that happened. And so, you know,

they really, they stuck, they held their ground over there. So fast forward, they started just building out more branches. So the end result was they started with one branch and now they have about, you know, 250 easy financial branches. So, you know, kind of going back, what exactly is the product they offer and what exactly, who exactly are the customers that, you know, that is their target customer. So their target customer, you know, is these non-prime people. And, you know, just to give you more of a sense of, you know, the world they live in and

how they compare to the typical person is, as we mentioned, they have non-prime. credit. So they can't go to banks, right? Like you and me, if we need access to credit, Andrew, you know, we can go to a bank, many banks, and we can, you know, work something out. You know, I have a Chase Sapphire Reserve credit card and, you know, I have prime credit. My credit limit is in the tens of thousands. Let's not brag too much over here, though, John. Okay. Well, I thought that was pretty standard. So, you know, so the point being, like, I have access to credit. Should I need it? Should like, you know, my car breakdown should, you know, I need a home repair, trying to, you know, consolidate debt or pay my bills and or I have some like unexpected crisis

in my life. And but a lot of people, you know, if you have non-prime credit, you know, you don't have access to these banks. You, you can get a credit card, but a lot of credit cards for people with FICO's of like from between five and 600 and that range, they are maximum limit is like $300, maybe $500. Their APRs are in the 20s and 30s. And, you know, but also, you know, they have a lot of fees and late fees they have to hit. But more importantly is the ceiling, right? And then, you know, their other alternatives are, you know, friends and family, which, you know, people, people do go, you know, go through and run through those people. And then payday lenders is kind of the last resort. And again, like, do you want to borrow 500 bucks

and when you may need 5,000 and pay 200% APR in that? You have to pay back in two weeks. Probably not. That's not the best source of capital. So when they go to go easy, right? 72% of them already have, you know, like credit cards, 40% of them already have at least one payday loan. GoEasy is kind of a lender of last resort. And so they're seeking loans typically between $500 and $10,000. That's for kind of on the unsecured spectrum. I actually think it's $515,000. But that's on the unsecured loan spectrum. Unsecured meaning like there's no collateral. And, you know, so the person, like if they charge off and they can't pay it back. That's just a risk that go easy is taking. Obviously, they have a collection process,

but just quick question here. You know, 500. So, and I'll mention this in a few minutes, but, you know, I'm familiar with some of these in the U.S. and 500 to 2000 is quick auto repairs, medical bills, that sort of stuff. But you mentioned that these go up to 10 or even 15,000. I'm just curious. What would someone need 10 or 15,000 on an unsecured kind of emergency basis? I mean, it's Canada. So I think they've got government health care up there. So I guess the emergency medical procedures are a little bit lower. So I'm just trying to think the bigger ticket loans. What are those coming from? Yeah, sure. And so the average loan size is around $6,400 for the unsecured. Yeah, so I mean, like at least the top reasons they cite are auto repairs,

home repairs, bill payment and debt consolidation. Debt consolidation could very well be, you know, like one of the major items. So yeah, so those are the big. So I guess if your car breaks out and you need like a $5,000, you know, repair like a pretty big thing or or maybe you just want help, like, you know, you to buy a new car, you know, or a new used car. Yeah, something along those lines. Or a major something happens in your home and, you know, and you need to pay a few thousand dollars, you know, and I know they know, unexpected life crises. But, you know, I think also these people, like sometimes I think they do have payday loans that they've racked of interest. They do have, you know, credit card loans that they racked up, you know, a thousand here,

thousand there. And they just want to consolidate it sometimes and just pay it down and only have one, you know, debtor who's go easy. Yeah. No, that's perfect. Please continue. Or I can start getting my questions, but I think you had a little bit more on the GoEasy background. Yeah, yeah. So just in the background for sure. And then they also offer, by the way, like a secure product right now. And secure goes from 15 all the way to 45,000, actually. They're longer term in nature. They are typically between six and 10 years in tenor, you know, and they are secured against your home. So, you know, it's only for people who have a house, about 20% of consumers who come in. They have a house. And so those people are eligible for those loans.

And, you know, the tradeoff is, you know, the unsecured loans have average interest rates right now of, of in the low 40s. And in the secure loans, it's more in the mid, you know, low to mid 20s right now. So in on a blended basis, the company has, you know, an average interest rate. I think three years ago, it was 54%. It's come down a 41%. So, and one reason they're trying to get the rate down is, I think, just trying to get ahead in case there's any federal government regulation, which I think the cap is at 60. That's like one, it was one bear case. There was one bare thesis on seeking alpha a few years ago, like, oh, they might lower the cap, but it was all, you know, hot air, but, you know, 60% and they're at 41 and, you know, they just made an acquisition. They're going to bring it even lower. Anyway, I think that risk is pretty much a non-event right now. But so that's kind of the background on who their customers are, you know, their loans. And then, you know, from there, anyway, even a few questions, we can definitely get to them. Yeah, no. So, hey, that was great background. I mean, you know, that's the stuff of somebody who's, you follow this stock for 20 years.

That was just, that was an awesome background. I guess when I look at this company, I'll just jump straight into my two major questions when I was researching it. You know, the whole time I'm researching it. And the first thing that's popping to my head is go easy at, I'm just going to call it $200, is trading at six times price to book, 30 times earnings per share. And we'll discuss the financial metrics in a second. But they probably deserve that, right?

They're growing quickly. Returns on equity are 20 to 40 percent, depending on if you include the goodwill. returns on assets approaching 10%. I mean, this is an incredible business with incredible returns. But when I kind of look, think opportunity cost or comp set, I look at the U.S. businesses, right? And like elevate credit is trading. That's more payday than subprime, but they're trading at, you know, a fraction of book. They're trading, they've got great metrics, but they're trading at a fraction of books. Something like op-fi, which I discussed with Kyle Serminar, the SPAC sponsor there, you know, that has a very similar story where

they say, hey, we're not payday lending. We're not prime lending. We're kind of hitting the people in the middle. And they do a little bit smaller loans. You know, they're more focused on $500 to $2,000 checks. But that right now, you know, it despaxed and it's traded down 20% and it's trading. It trades at nine times EBITA, something like that, despite great growth metric. So I guess my first thing is, this is Canadian, but why is this trading at such a big premium when kind of U.S.-based competitors trade at such a big discount? And that'll probably bring us into regulatory, which I'll follow up with the question on regulatory. Yeah, absolutely. And so I'm sure a lot of these, you know, U.S. businesses are mentioning, you know, they are trading in optically

cheap multiples. I don't know a ton about them. They do offer and operate, you know, in very different spaces. I think for two main reasons. One, a lot of them are primarily online and, you know, online lending, you know, and the branch base, you know, omni-channel lending. And especially kind of the long-term vision that GoEasy has and which, you know, make it a very differentiated model, you know, is one difference. And the other. is that as you mentioned, like they're in, you know, payday lending, single pay territory where these loans, you know, are, you know, they last maybe weeks, I don't know, maybe months, sometimes in nature and much higher interest rates. And, you know, there's a whole different set of economics that come along with that, right? You know, you have, you know, if it's more of a, you know, and also the U.S., there's one structural reason the U.S. tends to have more commoditized product because the companies without records of data and histories of data have more easy access to credit from the credit, sorry, to data from the credit bureaus. on like people and their payment histories and this and that, which doesn't exist in Canada. So a startup can a lot more easily, you know, get, you know, better pricing, better algorithms

and better underwriting compared to the existing players. And so, you know, so, you know, customer acquisition costs and especially, you know, provision rates are very different for payday lenders, you know, so the whole margin structure is very different. Again, I, those could be home runs and there could be way better investments than go easiest today. I simply, you know, I haven't, it's not something I've spent an awful lot of time on in the U.S. And I will certainly, you know, tell you about GoEasy. But sorry, go ahead. You know, look, investing is a game of conviction, right? And if you've, obviously, you've done the work on GoEasy. So if you're convicted on Go Easy, there's no reason you need to go and look at these other guys. But that was just the first thing that gentleman in mind. I guess second thing. And then we'll go to Regulatory. Just going back to the numbers, you know, returns on assets are approaching 10%. Returns on equity, 30%ish or something. These are crazy numbers for. a company that lending is a commodity, right? You're giving people money. Money is the ultimate

commodity. They don't care if they're getting it for me or you. They really just care about are they getting the best rate, the best terms, when they need all that type of stuff. When they need it, I think does a lot of work in that sentence for a subprime lender. But still, it does strike me as a little bit crazy that I heard you on Wells Fargo and all these other guys with Drew, but it does strike me as a little bit crazy. Like lending money, 40% R.O.E., it's just very high. So how is nobody coming and competing with these guys? How is, you know, why don't you and I go start up a loan like this and do this type of thing? Why doesn't, why haven't banks move back in? I mean, 40% returns on equity with 10% R.A. Like, you can take a lot of

basil hits and still make a lot of money on your, a lot of big capital charges if you're a big bank and still make a lot of money on this type of lending. Right. So I think, first and foremost, I do think those ROA and ROE numbers are inflated. They probably include, that gain on sale or gain on investment, sorry, that they had this year. You might be right. You know what? I do think I was using their adjusted numbers, though, because for viewers who want to get in the week, if you go look at their financial statements, and I love this, right? They say, like, hey, in the LTM, our EPS was 10, but that included a gain on sale. I believe they sold a small investment to a firm or afterpay, one of the BNPLs. And they actually backed that up, right?

They say our EPS is 10, but our adjusted EPS was 8. And I think I'm using their adjusted numbers, but I'm not 100% positive. Right. So either way, I mean, their numbers are high. I think in a unit economic model, like if you start with like a dollar lent out and, you know, 41% average interest that they receive and 13% or sorry, now it's 9% average charge off and then, you know, their interest rate is below 5%. If you kind of worked down the margin math, you get to about 10% kind of normalized return of capital, you know, 23% return in equity, still very high. So yeah, so how does this exist and why does this exist? It's a very good question. And it's something that, you know, after a lot of studying, I feel, you know, pretty

confident about, you know, I think there's a couple barriers to entry. Then I think there's also a couple very significant kind of competitive advantages that the company holds. You know, the first couple of barriers to entry are just functions of them being in the business for so long and having built up the business to what it is today. You know, the first being is, you know, if you just like three years ago, 2017, 2018, they issued like a series of unsecured notes for 7.9%. And so they were paying almost 8%, you know, and I think back in, if you look in the easy home days, they were like paying like 12%, 13% for their unsecured notes. If you're just starting out on your lending, like, this is a tough business. Most companies don't make it. And the banks, like,

they know this and they charge you a lot for your debt. Now, because they've proven the strength of their model, they've proven the resiliency of their model, they've gotten their interest rates, you know, all the way down to, you know, the blended is right now, I think 4.6, 4.7%. It's really low. And so, you know, so first of all, new entrants, you know, who are going to be paying, you know, five, six, seven, eight percent above, you know, an interest, then what they do. You know, that's a whole, you know, then that's money. You either have to, you have to make it up somehow or you're just going to earn way lower profits.

You know, again, like these guys, when they first started easy financial, their operating margin was like 8%. So, you know, five to eight percent could allow, like, you know, that makes a big difference. Anyway, you know, the other reason being they, they've been around for so long, they've done tons of advertising, you know, all, you know, they have 250 easy financial branches and 150 the easy home branches. So like 400 billboards all across Canada, you could call it, where people are just like ingrain and, you know, the consumer awareness is very high of people in that segment. So anyway, you know, it's also that brand power. You could buy somebody with

with very deep pockets could build, you know, tons and tons of branches, but also like you need a lot of time in many years to kind of get that in people's heads. As far as the competitive advantages, you know, I think there's two things that really, really would make it difficult for you or I to go in and just certain 40% ROEs and like to eat their lunch. The versus that they have a very, you know, a big trove of data that they have accumulated from underwriting. You know, I think at this point they've originated like billions and billions and billions of dollars of loans, you know, on a cumulative basis. I think it's between like five and 10 billion. This year, they're going to originate like $3 billion alone alone. The only existing

competitor that has more history is Fairstone because like they're the legacy of easy financial, sorry, of city financial. And by the way, Fairstone can't really compete in the same way they used to. They used to be kind of like neck and neck because they got acquired by Duobank, which is a bank, a merchant bank in Canada, and now they're subject to all of those rules and regulations that banks are subject to, right? Like the Basel regulations. Let me give you a pushback there then, right? So Duobank, when they acquired Ferrisone, I'm sure that they knew they were subject to all these rules and regulations. So why would they go, you know, it comes back to if banks aren't getting into the space, right? But Duobank just bought this company. Why would

they buy them when they knew that they were going to be subject to all all of these rules and regulations? Right. They bought them because they, they did receive an advantage that is, is that, you know, I need to look out for is that their rate of borrowing went from like 5% to between 1% and 2% because they can use deposits. Exactly. Exactly. So that's the advantage. That is the advantage. And also like, why would Fairstone sell? They were actually owned by private equity. And so, you know, like J.C. Flowers and I think, you know, one of the company. And then so it was, being private equity managed, which, by the way, when a company is being managed for private equity, they're not necessarily how the consumer in mind. It's more slashing costs and optimizing

profits for an exit. Anyway, look, point being, if I'm worried about any competitor in the industry, it is definitely fairstone. And that's go easy has their like laser focus on them. But, you know, thankfully, it's a massive market, which I'll definitely, you know, get into and touch on. So there's more than enough space for the two of them. So, you know, besides those two, right, like they have all this data. So what I was saying earlier in the U.S., what you can do is, You know, if you're an entry, you can, from the credit bureaus, you can buy data on consumers. You can see, you know, like in addition to seeing what their payments are on debt, you can also see information like, you know, the history of payments on utility bills, like their, you know, they're electric or their water bills, things like that. And there's other data that you can receive.

In Canada, the basic privacy laws are a lot stricter. So if you're starting out, it's actually, you know, and you know who told me this was the CFO of Q. actually, you told me this on a conversation was, you know, between the U.S. and Canada, Canada is like a lot stricter. So therefore, it's all that much more important to have your own data and underwriting. And, you know, it makes worlds and worlds of difference if you're starting out right for Go Easy. Like even they, you know, they talk about how far they've come in only the last, you know, three, four, five years alone. Every year is like so much better and better. Even just over the past couple of years, they've started to use like machine learning

to, you know, buzzword and not overstating anything, but just to, you know, kind of like, through their data and make it as good as they can because the better underwriting you have, the lower your chargeoffs on average, you know, the higher probability the customer is not going to default and or have to refinance or you can optimize the rates, you know, it's a hard business. It's a really hard business. And so, you know, also what is also kind of should be understood is that credit scores in general are good at predicting payment behavior for prime customers, but they're really bad at predicting credit payment behavior for non-prime customers.

So, again, people say, oh, just use the credit score. And that's really good if you have prime, if you're like 680, 700 plus. But if you're non-prime, like the correlation is very low. It's insignificant. So if you consider FICO or the Canadian equivalent means nothing. And if you don't already have your own stockpile, like you're, you know, it's a total guess. It's totally random.

And you're kind of screwed. So then, you know, the other thing I kind of mention is, and this is, And this is, I guess, up to more interpretation, but I think management and the skill of management, their track record and the vision is definitely a big strength of GoEasy. And it's probably the biggest reason why I have confidence, you know, going forward. You know, as I mentioned before, they have a chairman, David Ingram. He was there from 2001 to 2019, 18 years as a run of CEO, you know, and he groomed the current CEO for seven years, you know, he, this guy named Jason Mullins, he worked his way up to become the CEO. of the company and the way he worked his way up and he caught the eye of David Ingram, you know, was a funny story. He kind of, he caught fraud that was going on in one of the

easy home branches and he became a rising star at the company. But anyway, he was groomed by that guy. And you know, with David Ingram, you know, if you ever sit down with him, he's one of these guys that you just think in your mind, I don't want to bet against him. He really leaves like a deep impression of you in you. And so anyway, he's chairman. He still has over $50 million dollars invested in the company through his shares. And by the way, the other chairman, Don Johnson has like over 400 million dollars. These guys are, there's like 26% inside ownership, very, you know, very deep skin in the game. And the current CEO, you know, so he's there, you know, the chairman still views the company as his baby and he's still

very much involved. So they're kind of like maybe a tag team with obviously the CEO having more responsibility. And Jason has done an incredible job. Jason Mullins, incredible job so far. Like, you know, you think of some of the things he's done so far. He's, you know, he really took initiative on the secure loan product to make that a bigger part of the portfolio. He, you know, he introduced like an auto loan product. We'll talk about that, you know, as well. He, you know, has really tried to improve the quality of the data and the underwriting. You know, he took the minority interest taken pay bright, which turned into a stake in a firm, you know, talk about as well as far as Tam. Anyway, and he just acquired lend care,

which was kind of very significant. And, you know, they got that. They acquired that seven times 2023 earnings. Anyway, Jason is extraordinary. When you talk to him, you know, he's always hungry to innovate products. They're always thinking, you know, years and years ahead. And he's incentivized also in order to maximize his, you know, his bonus and to compound earnings at 30% a year, you know, on a trailing three year basis. So he needs, you know, if you look at trailing three years, like the average of that earning growth needs to be 30%. Again, that's good. And that's also might be the biggest risk in the company, by the way, of just, you know, management, you know, trying to reach the numbers and that was actually the next thing I was that was maybe not the next thing

but I had that on my list of questions but one thing you didn't say there which I was just flipping through to their annual reports to confirm I was right you know the other thing they did is in 2020 they bought back a lot of 42 million dollars worth of stock which I think their average market cap last year was under a billion dollars so that's a significant amount of stock at 55 per share and as you and I are talking this is almost a $200 per share stock so you know this is a fine And I don't know a lot of financials that bought back stock in 2020. And in particular, I don't know a lot of financials that bought back stock pretty aggressively in 2020. So, you know, that is the sign of some very shareholder friendly and very astute capital allocation. I would agree. I would agree with

you there. I'll even knock management a little bit. The only knock I have on the company and them is that, you know, they've become much better at repurchases. And I think to what you're saying, I agree. It's a good sign of capital allocation is the only knock I have is they've been paying dividends regularly and at a pretty high rate. They've increased to the 35% of trailing earnings. And it's, you know, I disagree with that because I think, look, if you look at what this business has done, you know, they've reinvested 100% of their otherwise free cash flow into the business to grow, you know, their loan originations to compound earnings, to compound, you know, their book. And this business, obviously, the results speak to themselves. And it's been a huge

success. But unfortunately, along the way, you know, because of the dividends that they paid out, they have had to raise a lot of equity. They've diluted shareholders. And if you do the basic map of, you know, all those, you know, tens, hundreds of millions of dollars of dividends that, you know, maybe they've issued over the last, you know, the history of the company, especially the last 10 years, if they taken that and just bought back their shares instead, like, and, you know, the both of the chairman have a lot of stake in the company. They own a lot of shares. Like, can you imagine? I mean, the share price, I don't know what the math is, you know, offhand, I've definitely done exercises, but it would be significantly higher than it is today.

We could be talking like a $400 company, $500 company. And even more, again, my mind's blown 20, 30% returns on equity. When you're financial with 20, 30% returns on equity, you maybe if your shares are trading very cheap, maybe you consider buying back. But I don't know many companies that have that type of return and say, hey, you know what we want to do? Send some money out the door to our shareholders. Like most of them would be like, let's plow this all back into growing this business. You know, you've mentioned how you think they might have a little bit of, I guess I call it data moat or data flywheel where they do more loans, they get more data, but they're just getting incredible return. So the dividend is a little bit weird. Let me, you started to allude to it, but let me ask you, you know, anyone who's invested in financials before knows the biggest red flag for a financial is a financial that's growing quickly, right? Because if financial grows quickly, it generally takes a couple years for your poor, for bad loans to kind of come back to bite you.

that might not be the case here because these are unsecured shorter term learned. So you probably work through the book quicker. But the financials that are growing quickly is commonly known as that is the red flag you want to avoid. And in this case, you've got a company. Some of this is growth. But I think they put out 2003 targets that say, hey, we're going to grow our loan book by 60% by 2023. Some of that's acquisitions to lend care and maybe another acquisition to come. But they're still growing this thing really quickly. So when I see this quick growth, my first worry is why is it not a red flag that this company is growing this quickly? Right. I suppose that's a fair point. It's a very fair view. So the way that they've done it,

and then I guess one can form an opinion of whether it's a red flag or not. I mean, so before 2020, before 2020, obviously COVID happened. And they were growing their loan books. I think, you know, the three preceding years. They grew it at something like around 40%, and the next year was around, you know, 50%. And then the year after was around 33%. that's in growth in originations, or sorry, growth in receivables. And yeah, they've been doing that is they're aggressively rolling out of their branches. And otherwise, you know, each branch also, you know, is also pretty quickly growing that their own loan books, right?

And again, their average branch is about, you know, $5 million in receivables right now. I think that number, you know, was like $2 million, not too long ago. And, you know, they're each, they're growing very quickly. And, you know, the company, you know, says that, you know, the cohorts are pretty stable. Like when you look at it, you know, the way that they go, they move in a pretty stable, repeatable trajectory. And by the way, also, like the stalwart's in the industry, they had like over $10 million. So that shows you kind of some of the opportunity that these branches can still mature.

But, yeah, so, I mean, the way that they've been growing was organically. If you look at all their data, kind of everything else is fairly stable, too. You look at their provision rates and their net charge-off rates. I mean, provision rates were around 13 percent, you know, for years, and it kind of stayed that way. Net charge-off rates were lower than that. and they were pretty stable as well. So I suppose there's nothing in the financials that was suggesting to me that something is awry here

and more so just you know you kind of look at all the money that they're spending to open branches and the advertising that they're doing. I think they're just getting a lot more customers. Like again, this was a very star, very star of niche like in the non-prime lending market, right? So, you know, I suppose that's kind of, you know, my thinking. And then also, you know, just during COVID,

which is very interesting. And it also kind of shows how astute management was, in handling this whole thing is March 2020 happens, right? And, you know, the whole world stops and freezes. And so, you know, you look forward to, you know, this business. Like, what did they do? So, you know, they stopped lending and they put a halt on lending, which, by the way, this is a business when in difficult times, their liquidity increases because they have principal and interest payments coming in, but no money going out the door to a rich in a new loan. So it's a good thing. Like, if you look in their investor deck, they actually have, like, you know, if we had a pure run

off scenario where, like, we just had to, like, run off the book and sell it and let it run, they would pay off all their debt, something around 18 to 24 months in, and they would have money left over. You know, obviously, that would be a bad outcome for the stock, but, you know, just, like, this is absolutely worst case scenario. Like, they wouldn't even have to declare bankruptcy or anything. So, you know, so they started, so they reduced their originations by 50% year over year in 2Q.

You know, reason being, they only wanted to lend to people who had, like, very secure jobs, like government jobs, very low risk of being fired, like high stability of income. They also had, and what really helped the results were, number one, obviously the social programs that Canada was running, which, you know, was more generous than the U.S. as far as, you know, helping people get through COVID, writing them checks. If you have a kid who's in school, like, you know, you get this stimulus every month, if, you know, everybody gets a general like this stimulus. And that really helped people pay down their debt.

Number two is the company, two-thirds of loan holders had insurance. insurance that they bought from GoEasy, you know, before all this happened. So when GoEasy sells like their products, another way they make money is through, you know, they have these ancillary products that they offer to you. And so one of them was insurance saying, hey, you know, like if something happens, if you lose your job, this thing will pay out your loans for, it comes out to about eight months. So barely two-thirds of the people said, okay, I'll do it. And so that helped go easy too. And that's how their net charge off rates and their provision rates. It's funny, it was about 13 percent, their provision rate before COVID. And now it says,

even before the LendCare acquisition, which was secured and has lower, you know, that business, the charge off rates went down to about 10%. Yeah. A lot of the U.S. players, I find this argument interesting where they say, hey, this is a little bit different than what you're talking about, but they say, hey, for COVID, their borrowers actually did better than they ever did because they got all these, you know, they basically live paycheck to paycheck and the government was just sending them money. So their borrowers, you know, in the U.S., a lot of them are saying, our borrowers are doing great, so great impact that we can't lend to anyone because they're getting more money than they used to get. But the other thing that I thought was interesting that they've said is,

look, our borrowers generally live right on the edge, right? So in distress times, we actually don't see huge upticks and chargeoffs because they're already, they're already living on the edge, you know, they're living paycheck to me, and a restaurant, a lot of them are restaurant workers or their jobs that don't really go away in financial crises or dot com crashes whereas like a banker or something, you know, a bank, a lot of bankers get fired. And if they've got some debt, that actually might be an issue because it takes longer to go find a new banker job or something. So I thought all of that was really interesting. Andrew, that's an excellent point. I'm really glad you brought that up because I think that's also been maybe the biggest variant

perception of this company and a lot of these non-prime lenders is that, you know, people think it's kind of the framework if you spend like a few minutes going through the deck, oh, they lend to these non-prime consumers. Oh, if a recession happens, they're done for it. Like they're toast. This business model is going to go under. But it's actually the opposite, right? You know, these non-prime people, they are a service industry oriented. They are, you know, they are living paycheck to paycheck. But, you know, these people, they're perpetually living in a recession. And so historically, if you look at the data, great financial crisis, you know, in Canada, there was an Alberta oil crisis in 2015 where a lot of people, you know, got struck really poorly because of the oil economy

and, you know, and even the dot-com bubble in the U.S., if you look back at those recessions, like, right, like the people who are living paycheck to paycheck, their charge-off rates, or in other words, their rates of not paying back their loans, you know, let's say they increase 10 to 20 percent on a percentage basis from where they were before, right? So let's say, like, the average charge-off rate was 15 percent for these people. Increasing 10 to 20 percent, it means 15 turns into like 16, 17, 18 percent. Not much of an increase, but the guy that you mentioned who has like a job at a bank, he has a really expensive mortgage. He has a BMW. He has a family of four. If he loses his job, the data shows that their provision rates go up double 100%. Goes from like 6 to 12. Or even if they went 3 to 5, right? Like if you go 15 to 17 or 3 to 5, 3 to 5 is a mammoth increase. Yeah. So 100% agree with you there. Let me switch and ask you regular story concern here, right? Because anybody here is some prime millennium is going. going to think regulatory concern. I think it's a little different up there, but you mentioned

I think including ancillary products, their average interest rate is 40%. I think they say the average interest rate is 34% before that. I'm guessing the ancillary products are things like you're talking about, which are pretty high margin, the payment insurance that they can buy from Go Easy and stuff. I'm not 100% sure there, but 40% is so very high, very high. It's not the payday lending 100% plus type APRs you're talking about, but it's high. I know in the U.S. 40% would certainly be a target for some type of cap that probably be right at where they would be looking at a cap. But I just want to talk broad stroke regulatory risk because a lot of listeners are domestic, U.S. domestic, and Canada is going to have a much different regulatory landscape.

So how do you look at that? Yeah, that's a fair point. And yeah, that's right. Like in Canada, I'm sorry, in California in the U.S., they are looking very recently at like 30 to 40 percent caps. I'm not too appraise of the situation there. So there definitely are. And in Canada, the same thing, like provinces can have their own, you know, rules and laws that supersede, you know, federal government. But yeah, so the federal government right now, their cap is 60%. I'm not going to say it's, it's like not possible. It definitely is possible. You know, if I had to pet kind of two risks to the company, one of them would be potential regulation. I mean, back in like 2017, 18, when this company was purely selling unsecured loans and, you know,

the APRs were between 36 and 60% kind of like reaching the limit. Yeah. I agree that that would be like a much bigger concern. So now they've brought down their interest rates to kind of combat that to an average of 41%. They're introducing secured loans, right? You know, it's funny. Like they're very aware of this. They're extremely aware of this. Like when I did a branch visit once and there was the person behind the counter with the computer like kind of the manager of the branch and like, you know, I was kind of peering over and she had like a list of like, you know, potential people who who called in or who were on the list for potentially getting loans. And like at the top, I forget what it's setting.

exactly, but something about secured loans was a priority. So I asked her, the CEO was there too, and I asked, you know, like, why is secured a priority? And I'm like, is that intentional? And they said, yes, like, we're purposely pushing secured loans, which made me think, okay, so these guys, they're very aware that regulation could change at some point. And so they are, you know, they're trying to, you know, land in the 20 to 30 percent range is definitely very safe, like, you know, as opposed to like landing above. And even more beyond that, like, you know, I guess my answer is it's potentially a risk, you know, but also, you know, payday lenders, they're definitely cracking down on even more, right? Payday lenders, like currently the law is if you're

lending below $1,200, you can charge kind of whatever you want, but they're trying to find ways to crack down on that as well. And so, you know, also if you look at, if you look at other ways that they're trying to diversify is, you know, they talk about, you know, Goezis management talks about, they want the customer, you know, they don't want them to perpetually remain as like, you know, as a subprime and non-prime borrower, you know, they're really interested in seeing them kind of graduate up the spectrum, both from, you know, the customer's perspective and from their perspective, too. And what they're building right now and kind of the next evolution of the company you're going to see, like the long-term vision, which is also going to very

much help answer these regulatory concerns is they want to become, you know, they want to become like a department store of products for anybody under the prime spectrum, which is not only the subprime and like the non-prime you see today, but like the higher non-prime and the near-prime people. So then you look at several products that they're introducing right now. And by the way, like at a very fast, you know, pace, like not an unreasonably fast pace that it's foolish, but like, you know, Jason, the CEO is putting his foot to the pedal all the way down and saying, hey, like, you know, like we're going to work as hard as we can to make this happen. They've, in the past year, like they were talking about introducing an auto financing product,

right, which so just as a little bit of an overview in Canada right now, the auto financing addressable market is like $20 to $30 billion. Jason thinks a lot of that is mismarked. So it may be anywhere from like $30 to $50 billion. So about 80% of that is from dealerships where like you go into your dealership and then you get financing on the spot like a credit acceptance in the United States. 20% of the market approximately is peer to peer where you just buy a car from like a friend or family or somebody on Craigslist. And so those 20% often they need financing. And so they want to help target those people say, hey, come into our branch. We'll pre-approved you for a car of like a certain like make model mileage you know years old and then you can go get

that loan so those those loan APRs would definitely be like in the lower end of the range and it would be secured against the car but can I just let me just give one pushback because it sounds great great Tam but it and I'm coming from the US so maybe I'm off but you know car loans are generally coming from banks in the US and you can tell me if this is but I see them getting into auto lending and I say oh well that's secured it shouldn't have run into a lot of the subprime you know, because it's secured, it shouldn't run into tons of the issues. You know, here, there are some subprime auto lenders, but those seems to be on the really low end, really junky type of vehicles. So they're moving into this and that's great. They're getting, they're getting

into a much bigger market, but I look at it and I say, what's their competitive advantage here? They're doing secured lending against the car. At some point, aren't they competing against banks with much lower cost of capital? Right. Yeah, they don't have a competitive advantage. it's another like right now yet they don't have competitive advantage um you know again like because i think if they were competing in within the dealer side of things that is so competitive and i'm not saying that they're better than like a credit acceptance in the u.s for instance like no way they've been doing it for 50 years i'm not saying they're better than the banks um i think right now what they're trying to do is just focus on that 20% of the market so maybe you know it's like six eight 10 12 billion dollars

and then eventually you know they haven't done this yet but maybe partner with some dealerships who are interested in making, like chains, like dealership chains, who are interested in making Go Easy, like the preferred partner. But you're absolutely right. Yeah, there's, you know, auto lending, people have been doing this for many decades. And it's a tough thing to crack. So, yeah. Let me turn to, we've mentioned most of the pushbacks, but actually when I was researching this, the biggest pushback. And I kind of mentioned this at the beginning, but I think it applies to broader structure. You know, I look at the company and I say, great. 30% earnings growth for the past two decades. Management seems great. Very aligned. Astute

allocation, as we've talked about. There's always a bigger market to lend to, you know, when you start talking to them, it's always bigger. But six times price to book. They just did an acquisition, so the trailing numbers are a little funky. But, you know, it's probably 25 times earnings run rate, six times price to book. Yes, the return on equity metrics are great. Yes, the return on asset metrics are great. But this is financial trading at six times price to book, 25, 30 times earnings. You know, your job, my job is all. ultimately like make off in the long run, it seems pretty pricey. How are we going to make alpha in the long run from this? Absolutely. That's a great question. And look, I've, I've been

very interested in the stock since it was at $40. It's now at almost $200. So certainly it's run out, but that also means like in a future opportunity is a bit obscure. Like I remember, you know, back like a few years ago, it was, you know, I had a trading at about eight times normalized earnings and it's growing at, you know, 30% a year. And, you know, it was, you know, definitely a very high-commission pick. And it still is. And I'll tell you why. So today, it's trading it about, you know, because I have it at about 20 times, you know, normalized earnings for 2021. So you can call it half a year forward, normalized earnings. And, you know, that's excluding the gain on investment they've had, but, you know, including everything else and, you know,

to reach a normalized number. And I have it, you know, also, you know, some management recently, they put out their three-year forward targets. And like, if you look historically, like, they put out three-year-forward targets often and just about every, you know, if you look back after like two years, three years, they've just blown away whatever targets they put out. So they've been very conservative in nature. But, you know, taking it at base value and kind of trying to get there organically and you can see an easy path is, you know, they think that they can grow, you know, gross originate receivables are going to be about $2 billion at the end of this year, right? And that's going to, you know, yield, you know, true free cash flow. They put out a new

metric of which I think is very smart of like, you know, cash from operations before net, before for net originations to grow the book, which we can kind of break down. But, you know, that number, I think this year originations are $2 billion. And, you know, and that kind of operating cash flow number is in the high, like, you know, 160, 180 million or something like that. In 2023, I guess, you know, they're digesting this Lendcare acquisition, which, by the way, if you, you know, after synergies that they're realizing, but more importantly, they only pay like 17X for this business growing earnings at like

40, 50%. they paid seven times 2023 expected earnings for it. Even if they're off, if it's like 10, 12 times, like they really got a great deal on this acquisition. So they think that in 2020, they are going to origin, they're going to have receivables of $3 billion.

So, you know, what does that imply? That implies growing the loan book at about 20 to 25% a year for the next two years organically. And remember, before COVID, you know, they were growing the book. In 2019, they grew their book at 33%. The year before that, like around 50%.

They've been, So they've been growing it at these very high clips. Again, they're opening branches and just organically, you know, getting more customers in. And now they have this Lentcare acquisition they made, which they had a $400 million book. And they grew that at between 45 and 50 percent over the last two years. So, you know, and by the way, so Lentcare, they do secure lending for like power sports, like jet skis, motorboats, things like that. And so they added a few verticals there just very quickly.

So anyway, can they grow their originations like, you know, receivables 20 to 25 percent? for the next couple years. Basically, if it looks anything like the past, I think they will. You know, management has a ton of credibility. They've executed time and time again. You know, would they really make these way, you know, overachieving forecast at this point? They could. They could be getting ahead of their skis.

I think it's reasonably likely. So anyway, if they reach, like, the origination's targets and then you do the math of like the yields and the charge offs, et cetera, after that, you get to around 12 times normalized earnings in 2023, as in today's price is about 12 times normalized earnings in 2020. 23. And I have that number around like $270 million in normalized free cash flow. And then you look from there and what's going to happen after 2023, right? Like you know, you're already paying three, two and a half years in the future for those kind of earnings. And that's a great question, right, Andrew. And, you know, let's so, you know, the original business, it's, it's getting

bigger. They're addressable markets about $45 billion in Canada. And that's anybody who is nonprime and that's all loans below $50,000, which are the two camps that they plan. And so how do they go from year, you know, if you take the organic business, you know, I would peg it maybe like, you know, call it like, you know, eight to 10 percent organic growth, you know, looking forward the next like seven to 10 years from there, right? Like they are getting, you know, they're only about three to four percent of the market right now, you know, as far as they're like unsecured, secure loans. If they like double that, then, you know, is growth going to slow a bit to the teens maybe and then looking at 10 years, you always want to be super conservative if you're going

to look at that far. I look at like seven years, like max, which is still pretty far to be confident a better business. But, you know, so let's say they compound it like, you know, eight, 10% a year, like, you know, after the 12 times earnings number, fine. I would bet that it's going to be higher than that, maybe significantly higher than that. And this goes back to management. So like you've already look at the last two years. They've introduced, you know, the auto landing product to expand pay bright, by the way, which they've entered the point of sale, buy now pay later segment themselves. So they took, just everything they've done has been kind of right so far. They took a $34 million stake in pay bright, which is a point of sale online

absolutely right so like you have you know which by the way got acquired by a firm and then a firm went public so go easy head shares and pay right which turned to shares of a firm which turned into a firm's like stock price and then by the way when a firm was at it was like 130 150 at some point early on they actually did a total return swap at 108 bucks or so and then the price the share price went down to like 50 so like they've done everything right so far there was some discussion on I think was the Q2 earning call or something and I saw them sales that. And I was like, damn, these guys are good traders. I was kind of doing all that path to my head. Yeah. Like, like maybe they should be running a fund. Right. That's where the real growth is going to come from.

They're going to run this. This will be the side business and they'll just run a firm trading hedge fund. Exactly. So that was really, I mean, they turned 34 million to like $112 million. But it wasn't about the investment. It was more about like, you know, again, like thinking about how, you know, they're thinking very astutely. They, they enter this business where like a customer, let's say they go to like one of these websites like Wayfair.com Canada, right, which a firm has a relationship with. And they want to do like buy now, pay later installments, you know, right. But typically like before there was a partner, like GoEasy. And by the way, there's only, he said like you can kind of in one hand the number of non-prime like buy now, pay later point of sale partners in Canada. So GoEas is one of very few.

I guess Kuro may be like another one. So you take this customer like they go to Wayfair.com and they want to buy a product. And if they're prime or they're good enough credit, like they can get those four installments at zero percentageers. If they're non-prime, if there's no partner who can underwrite that because, like, you know, the company doesn't want to underwrite that or, you know, a firm, sorry, a firm doesn't want to underwrite that. They don't, they don't have the data. Like, they don't feel comfortable taking it on their balance sheet. They now partner would go easy. So then the customer now will say, okay, you can actually qualify, like it might be like a 12-month loan. It might be like 20, 30 percent, you know, APR, but, you know, if you want to do this,

we can do this. And then the go easy, we'll take it. So they make money there. The main reason was they wanted cross-selling into their Go-Easy products because once the customer, you know, is like, gets that loan, they're in Go-Easy's ecosystem and they can get emails and marketing. So he also said that the cross-selling advantages were about, you know, 25 to 30 percent higher than expectations, right? So anyway, going back, closing the loop, like that's an example of like, you know, something they're doing, co, like expand their TAM and increase the revenues. Like also, I don't know if you saw, I'm sure you did, they have this past quarter, they took an

interest in Brim Financial, which is like a startup credit card provider, you know, partner in the MasterCard. And I'm sure, I'm sure the conversation, like, maybe has something to do with, you know, Brim wants to offer the credit card to non-prime consumers, but, you know, they're, they're younger. They don't necessarily want to take the risk of underwriting to non-prong consumers. They don't have experience doing it. And where Go Easy is kind of, you know, very interesting, like, kind of long term. Like, they had their customer facing easy financial brand, but, you know, LendCare, they're going to use the Lend Care brand and do the back underwriting for that. They have a firm where they're going to do the underwriting for that, but they don't have a

consumer facing. Now Brim Financial, they don't even need the brand. Like, it's Brim Financial's credit card, but they're doing all the underwriting in the background because they're just simply like one of the best in the whole country in doing this. So going forward, it's like, you know, you think of how they can just become like, as the CEO says, like when a prime customer goes into a bank, they can do anything. They can get a bank account. They can get a credit card. They can get a loan. They can get a mortgage. Like, he wants to be that kind of company for, you know, non-prime consumers. They can go in. They can get an unsecured loan. They can get a secure loan. They can get a secured loan. They can get an auto loan. They can get a point of sale finance. They can get

like, you know, like jet skis and power boats, anything that they want. And so when you kind of think about a $45 billion, TAM, right, as far as, you know, your receivables, they only have two billion in receivables. They'll have maybe three, you know, and it's still very fragmented beyond that. Like how many different avenues can they execute? And that's where you do need, you know, a lot of people, you know, they think any trusting management in any way, shape, or form is the leap of faith. And I can't fault them for that. You know, there's a, you know, there's a, you know, know, it's to each his own. And, you know, I firmly, you know, have a lot of confidence in this management team. And again, they have a ton of skin in the game. Their incentives are aligned,

like, two compound, you know, earnings per share, probably one of the best metrics possible. So that's what gives me confidence. And they've proven it over the, they've proven it over the decades, too, right? Like, this is not a management team that's getting a 30% earnings per share target for the first time. It's a management team that's done it for two decades at this point. And then I guess the only other thing I'd add to your tan thing is like, you know, with these with a subprime consumer, it's going to be generally smaller dollar loan values. And the great thing about this is, like, one of my first principles I keep coming back to is time and time again, you are seeing you want to be invested in the company that owns the,

owns the consumer, right? And in this case, this is a consumer that's probably a little bit harder to reach because they're subprime. And you can't spend as much, you know, Chase, they can blanket, Sapphire, they can advertise at the U.S. Open for Sathire customers and stuff. You can't do that here. Go easy. They've got actual physical storefronts.

I just think they've got a real customer acquisition advantage and that kind of wraps since the whole thing you're talking about. Let me ask one more quick question and then I'm going to let you wrap it up with final thoughts. You know, long time listeners will know I'm a stickler for this type of stuff, but lend care. You mentioned they got a great deal on lend care. And that raised two questions for me. A, how does any company get a great deal on an acquisition?

And then B, this was $3.23 million deal closed in April. The founders are all staying on. And I noticed on the call, they said, hey, the founders are staying on and they're so confident, they're rolling some of their equity into the company. They're going to take 12 million of equity in Go Easy. And I looked at that and I said, well, they're cashing out for 320 million. 12 million of equity isn't, you know, exactly a huge vote of confidence. And I'll let you give the pushback. There's obviously pushback to that thought, but it's always something I'm a stick up for.

So how did they get a good deal? And why, if the founders were so pumped up here, why didn't they kind of roll a little bit more equity? Yeah. Did they say how much equity the founders actually had to begin with? You know, that's a good question. In my head, I think I'd naturally assume their founders, they're cashing out for $323 million. They're getting the vast majority. But it's very possible that this was a finance company. They raised a tonne outside capital. And they got 20 million in the sale, and they're rolling 60% of the person. So I do not know the answer to that. Yeah. And no, it's a great question too. And the other thing I wonder what the whole structure is,

Like, it was private equity owned when before Go Easy bought it. So maybe private equity had something to do with, you know, when they bought it from the original founders, how much of the flesh they wanted to keep. And anyway, no, but it's all a good question. I will say, you know, as far as, you know, back to one of my two risks, one being regulatory, two being kind of management's been driving, you know, at 90 miles per hour, it's all been great so far. Can they hit a brick wall at some point?

And, you know, maybe like the incentives of compounding earnings at a high rate, like, could that lead to, not necessarily like bad actors, like at all, but just more like, you know, you get it over your skis or you get a little bit too optimistic about things. Like, this could be an example, right? I mean, they did acquire it. Like, why did, you know, the company sell for, you know, less than one-time's book, it seems. Or it might not be less than one-time's, but I did the math.

And it could be around like one-time's book. And, you know, because they paid $320 million, you know, $400 of loans. But, you know, how much they didn't release, like, the balance sheet, like how much was, you know, the debt equity, other, otherwise. You know, forget, we can even forget about book. You mentioned the multiples early, right? you're talking low teens, multiples on your term numbers, maybe approaching single digits on three-year-out numbers, right?

Like that's a very cheap multiple, especially for a company growing this quickly. And the company said, Go easy says we got a great deal, but it raised the question, this company's growing quickly, they know their value. Why are you getting a good deal when you look at all of this? Right. And $400 million of loans to yield $20 million in earnings, right? So if I, you know, obviously there's more math than that, but roughly like 5%, you know, add back whatever interest, but maybe it's not a terrific business. Those are definitely

questions, you know, that I have outstanding and, you know, and definitely want to dress with the company. I totally agree with you. There are, you know, they're at the top of my priority list, kind of, you know, lend care and then also, you know, brim financial, you know, kind of what the vision is around there. So, yeah, it's, I mean, it's very possible. Again, like, you know, it's the only other kind of saving grace, maybe they, you know, maybe they know it's not a terrific business. And I'm just kind of, you know, speaking maybe for my own thoughts. Maybe it's not a terrific business and it just allows them to get into more verticals. But the fact is like, you know, you buy a mediocre business in a few years, seven times earnings, you know, after like all

the, you know, everything's realized maybe that's going to be accretive to economic value and that's okay. Again, like what kind of at least, at the very least, what I hope is not the case is if it's a mediocre, this is a mediocre economics is that it also doesn't have like a bad customer brand, right? Just go easy, you know, in this business, you can't build like a great brand. You can't build a brand with like a 90 NPS that your friends are going to, everyone's going to brag about. Like, it's people in desperate times. But, you know, as long as they're not like, you know, screwing over the customers or anything like that. So I think it's a good one, Andrew. Cool. Well, hey, John, I want to give you the last word. Actually, my last question had been,

you said there are two risks. One was regularly. What's the other one? And you mentioned it. You said they're driving 90 miles per hour. And that kind of goes back to the old, the scariest thing is a fast growing financial. But I want to give you the last word. We've covered. a lot here. I know anyone who's listening can tell you've done tons of work on the company in the background here. Is there anything you wish we had hit that we didn't hit? Anything you think we should hit harder? Just any lingering thoughts you had here? Yeah, sure. No, I really think we hit a lot, Andrew, but, you know, just a couple of quick things. One is, you know, really a lot of the variant perception here is, you know, or I should say the bare cases that people I've heard

along the way, bear cases, misconceptions, kind of caution, you know, has been over, like, non-prime customers and what we already talked about, the fact that they, you know, are more resilient than people think, you know, kind of the biggest misconception I've heard from from other investors, or it's not a misconception. It's just a caution is, okay, so go easy. Like they have, you know, they kind of started this business in 2011. Yeah, they had that blip in Alberta, but they haven't been to a real crisis. They haven't been to a real recession yet. And so, yeah, this data from like 2001 and 2008, that's great that non-prime people are resilient. But how do we know Go Easy's customers are going to be resilient, right? And I just think, like, you know, the past financial crisis,

or, you know, the past crisis slash COVID, in my mind, just totally debunk that myth. I think that, you know, they made it through their charge off rates on a net basis. You know, they decreased. And, you know, the CEO, he made a comment kind of offhand that even if the insurance product had not existed at all, which, you know, did help them. Because my question was, okay, but what if you didn't have this insurance product, right? Like next time, let's say, your insurer, like don't want to give you access to these insurance products like that cheaply for your customers and therefore take rates are going to go down or it's going to be more expensive for them and then you don't get that saving grace he said that you know I think it's a combination

of the business resiliency and then also you know the social programs in Canada their charge off rates were still lower than 13 percent they were still lower than what they were pre-COVID so you know I think like you know basically also like keep in mind like you know their pre-tax margins or 22 percent and their charge off rates are 9 percent that means for the company to break even not even lose money, just break even. In some crisis, like nothing like we've seen before, so at least multiple times worse than COVID, like the charge of rates would have to go from like 9% to 31%. Right. And that's probably unlikely as far as like resiliency of the business model. So I just, my point there is I think this has been a debunked myth almost entirely, you know.

And this might be bringing my politics a little bit into it. But I mean, I just think politicians have seen, especially in COVID, like when there is a crisis, just bail everyone out and you'll keep your job, right? But I kind of agree, like, especially in COVID, but, you know, during a crisis, I want to see checks out the door. And I think politicians have gotten the memo. People do not care about debt at all in general. Maybe that's right. Maybe that's wrong. But in a crisis, people especially do not care about debt. And in a crisis, I think going forward, we just see there are just checks going out the door, which is probably a big benefit to them. I don't know if that's too crazy or too political. No, I mean, it's something maybe I didn't quite like want to say necessarily,

but you've said it. And so I kind of agree. We opened that Pandora's box. We open the Pandora's box. Like long term, is it maybe fair to change the thinking that in crises, like the government will to some sense provide assistance to the average person, which will help,

you know, the non-triam lenders, you know, from seeing the customer's charged off. I think it's a very fair assumption. And I mean, if government isn't there to provide assistance to the average person when they need it, like what is government there for then?

I don't know. I'll get maybe too political. And then. And I guess, sorry, just, you know, one other thing, just really stressing kind of the long-term vision here. Like, you know, and to add one more point, like, you know, again, like people see this company, you know, right now in Canada. Like, they're the leader at what they do on secure lending and they're branching out. But there really is no company that exists, like providing like a department store of all sorts of financial products for people under the prime threshold. No company exists.

Go easy, wants to be the first to do that. And, you know, if they do, you know, I think. it's only going to increase, you know, their, their mode even further. I think it's, you know, they already have like kind of the brand power that I talked about, that barrier to entry, barrier to success and, you know, the data that they've gotten, like, if they had all these products and if they all succeed and they get market share, obviously, you know, penetration and the TAM is going to increase, like revenue is profits will increase, but also the staying power of that brand, like if you are a customer and you're near prime, right, like you,

you know, you're, or your, you know, high non-prime, low non-prime, subprime, and you go to any of these one products that they have, and they might have, like, they're going to have at least five or six, you know, by the end of, you know, end of next year. Like, who knows what they're going to innovate even more? And then, like, if you're in that ecosystem and you have, like, you know, a fine experience and they can charge you lower rates than anybody and give you more options, just like, you can see how the flywheel just really starts going and, you know, and the opportunities are kind of endless. And then, you know, two, two data points there is one, the near prime segment, the near prime tam, meaning kind of like, you know, in the 600's, let's say, you're below prime,

but not too far. That tam is about two-thirds of what I'm talking about. So if their tam is 45 billion, the near prime is about 30. Right now, they're kind of almost entirely in that 15 billion tam. So like, what they're trying to conquer and unlock is like they're going to triple their tan basically from what it already is and what their numbers already reflect. So that's important to understand. And if you get near prime, you can probably start offering, hey, we've got this customer, you've got near prime. You mentioned credit cards, but you'd probably even start saying, hey, we're going to do maybe not mortgages, but investment products at that point, you're probably starting to look at investment products.

So there is a lot of kind of bolt on opportunity there. Yeah, yeah, you should talk to Jason, the CEO and give us some suggestions. I'm sure I'd appreciate that. And I guess the other thing is also they have mentioned international M&A is very much possible. You know, in fact, I was kind of surprised, like they had a big kind of M&A that, you know, they have been speaking about for quite a bit now for a couple years. So lend care happened, which was national, which is not, it's not what they've been talking about. But I think David's saying, like, you know, opportunistically, they don't have a set hard timeline.

He's really made a point. Like, we're not going to do it for the sake of the numbers. We're not going to do it for the sake of doing it. But we really do think, you know, we've done our research. And there's other, you know, developed nations with similar profiles, like the U.S., UK, I think Australia, he mentioned. Those are the three countries that, you know, come to mind, definitely the first two. And that, you know, there is still kind of like a niche, a large niche and a large tan of non-prime customers who are underserved, who kind of don't have, you know, who don't have access to,

you know, to these products that we're offering. And, you know, their alternatives are not as great. And again, like, you know, I, that, if they, you know, cross that bridge, you know, it'll be time to kind of analyze it as it comes. But it's just another also potential source of, you know, if you trust for them to make smart decisions, maybe it will be another huge source of value creation. I think that's exactly right. You know, you worry, it's a Canadian lender and the history of Canadian lenders or anyone international lenders going into any emanating into any other market is pretty poor, but that is a place where you would look and you'd say, hey, these guys, they've got a lot of skin in the game. If they're doing

it's because they believe in it and their track record is really good. So that's where you've come. John, I've actually got something going up. So this has been great. We've run a little bit over time, but I've really enjoyed this. Anyone who wants to learn a little bit more about John, I'm going to include the link to his Twitter handle because Twitter rules all. It'll be in the show notes, so please follow up with him from there. John, this has been great. Thank you so much for coming on. It's been great. You're the best, Andrew. Thanks so much.