A PROFITABLE BUSINESS FOR FREE
ANNUALISED PROFIT OF $3M+ TRADING AT CASH NTA AND NO DEBT AT OPERATING COMPANY LEVEL
- YOU GET THIS PROFITABLE BUSINESS FOR FREE
- MICROEQUITIES HAVE RECENTLY BECOME A SUBSTANTIAL HOLDER
-NOT A BUY NOW PAY LATER BUSINESS, MISUNDERSTOOD BY THE MARKET
MICROEQUITIES -
Microequities is a fund manager that I follow and I see them as one of the best small/micro-cap fund managers in Australia. They invested in Promedicus when it was under $1.
They mentioned in their recent micro-cap presentation that they had brought into a business that is basically trading at its cash backing and its profit would be equivalent to its market cap over the next three years. They essentially see it as having a 100% plus upside as it has been totally mis-priced by the market. So you get this business for free. Well that business is BeforePay. They have $18m of cash and if they didn’t lend any more money out to customers and collected receivables then that cash balance would equal $30m including the $18m of cash they have in the bank. The market cap is $28.9m and their NPBT for the last 9 months was $2.5m.
Have a listen to what they say about it at at 23 minutes, they don't mention the name but its obvious its BeforePay as they have just become a substantial holder -
https://www.youtube.com/watch?v=HPNn-M5_kcQ
BUSINESS MODEL - NOT A BUY NOW PAY LATER PROVIDER
BeforePay loan out small amounts of money, average $387 to 37,000 employed workers every week to help them overcome short term cashflow issues, like paying a bill, rent etc. The loan is paid back in 26 days on average. They charge a 5% fixed fee for the service, so $20 on average which is a great deal for the customer as its quick, easy and there are no application fees. Defaults have come down to just 1.6% from 7.5% in 2021 due to sophisticated AI capabilities in evaluating customer loan risk.
Beforepay won two awards in the APAC Insider Australia Enterprise Awards 2024: Best Ethical-
Lending FinTech 2024 and Most Innovative Ethical Lender of the Year 2024.
CYCLICAL BUSINESS
The business is cyclical in nature and defaults tend to be highest in the third quarter, as they are following the Christmas period. The first quarter is the best quarter as defaults are low due to their customers receiving their end of year tax refunds. I think the market doesn’t really understand this and that is why the stock sold off yesterday when they announced their quarterly.
VALUATION AND UPSIDE POTENTIAL
- They are expanding overseas by looking to sell their AI capability to larger banks and financial institutions overseas. These institutions would risk their own money but use Beforepays tech, so no downside risk for them. They will basically just clip the ticket on loans issued. An announcement in this area could be a large catalyst going forward.
- They are also looking at lending larger amounts ($2000-$3000) to customers that have a proven track record of paying on time and this could be a earnings catalyst going forward. They are wanting to do this in a very conservative way.
- The business is profitable and should make $3-4m in profit next year. If we assume $3.5m and a conservative 10x multiple then we can value the business at $35m plus the $30m of NTA, so $65m. So on that basis it would be worth a $1.38 per share and currently the share price is $0.615.
TAKEOVER TARGET
With BeforePay trading at below its cash NTA you would have to think that it has significant takeover potential especially considering the AI tech they have developed which could have massive cost synergies for financial institutions across the world.
RISKS
The biggest risk going forward is an increase in defaults or management increasing spending to drive growth. They have refined their AI capability and defaults are not likely to increase and have been trending down dramatically over the last year, but it is something to keep an eye on.
They are investing to fund overseas growth but have stressed that this is been done very conservatively and they seem to be very focused on staying profitable.
