Hi Folks

Like @Travisty I’m a brand-new Strawman member this month, and wanted to start making a contribution to the Strawman community with its insightful & informative member stock discussions.

I wanted bring a new small-cap idea to the table - and shine a light on what I believe to be an excellent medium-term investment prospect for members, in the lead-up to their half-yearly results tomorrow.

Earlypay (EPY, formerly CML Group) is a micro/small cap which specialises in Invoice Finance & Equipment Finance primarily for SME clients. I note the company dropped off this forum and everyone’s radar around 3-4 years ago – completely understandable given this was when the former management’s lax risk & credit management practices & aggressive “all growth is good growth” ethos caught up with them, and the company suffered a near-death experience from the collapse of their single largest (by far!) invoice & trade finance customer, Revroof.

During the past 2-3 years the company has undergone a complete internal makeover, with a very comprehensive review & overhaul of their underwriting policies & credit risk procedures by the new executive team, as well as a very deliberate rebalancing of their customer book away from large-single-client/industry risks to a far healthier mix of SME clients diversified by industry type & geographical region. They have capped the permitted size of any one client, and strategically retreated from the higher risk Trade Finance offering - to concentrate on its bread & butter of Invoice Finance (IF), with some Equipment Finance (EF) to boot. They now oversee a much higher-quality, diversified loan book as a result.

After the RevRoof debacle, the stock was understandably relegated to “Investor Purgatory” for a prolonged period, and drifted off small-cap institutional radars as a rightly sub-investment-grade proposition.

However I have kept a close watch on the company throughout this period, and over the past year built a decent position in it as I felt more & more comfortable under the (competent, frank & intelligent) new leadership of CEO James Beeson, and could see the many pieces of the puzzle steadily falling into place that would see the company return to an investment-grade quality, and likely attract some greater micro/small cap institutional interest.

The company is scheduled to deliver its 1H FY25 results tomorrow, and I would encourage anyone interested enough to check-in on the results webinar, to get a feeling for James - and perhaps pop it on your radar going forwards.

Key highlights/metrics/drivers & thermatics at play (my quick summary only):

·        Company has completely overhauled its risk policies & team culture since Revroof. A far better governed company, team culture & loan book than some years ago (they have strategically shrunk & retreated to their core strengths & a more sustainable business over the past 2.5 years).

·        Almost all of the strategic retreat from riskier clients & product offerings & resultant earnings-headwinds are now behind it, and the company is again sustainably profitable & positioned for growth (but this time sustainable & quality growth!).

·        FY25 EPS forecast (as of AGM in Nov 24) is 2.2cps [up 28% from FY24]. They have noted this will be somewhat weighted to second half, due to timing of new major finance warehouse facility (cheaper wholesale funding will improve margins) & the last of the deliberate client run off lost revenues are incrementally replaced.

·        Current Share Price of 22c puts it on an undemanding PE of 10x for what will now be a growth company (not eye-shattering US tech growth, but what should be pleasant steady & sustainable organic growth, and that assumes no further M&A).

·        Dividend payout ratio on way back to 60%, being 1.3cps (5.9% yield).

·        Awareness, penetration & acceptance of Invoice Finance in Australia is much lower than overseas comparable markets, but steadily increasing (i.e. both product & market size growth)

·        Following the acquisition of “Timelio” FinTech invoice finance business in Nov 2023, the company acquired & incorporated some industry-leading IF tech/software & know-how, and just as importantly improved their team make-up with some terrific Timelio team members (many of whom came from Bendigo Bank’s invoice finance team, which Timelio acquired in early 2022).

·        The Timelio acquisition has allowed Earlypay to really up its ante in distribution, and it has recently supplemented its existing traditional distribution channels with a number of new (more tech-facilitated) channels such as embedded finance partnerships (i.e. embeds option to finance invoices in its partners’ websites – such as labour hire & recruitment partners – thereby raising its profile with new potential customers it wouldn’t normally reach, and helping create a real ease of engagement with the product (not to mention quick approval/turnaround, which is so important when competing with other Fintechs).

·        CEO also owns close to 5% which is nice alignment of interests.

·        Cautionary Note: EPY is a somewhat illiquid company, being tightly held (top-20 ownership at nearly 74%). So not one to chase too hard on market, but from experience best to nibble on weakness & quietly hoover up few shares at a time as and when the opportunity arises (i.e. odd sellers move on, probably needing liquidity & tired of awaiting the market to re-rate). Top 20 ownership includes COG (>21%, see more about their stake below), as well as highly regarded small-cap fund managers Thorney Opportunities Fund (Melbourne based Alex Waislitz) at 12.88%, and Sandon Capital at I think sub 5% these days.

·        Being more of a corporate mis-steps/recovery play, I have not attempted to do a DCF on EPY at this point in time. I feel we need to see at least another year or so of post-recovery financials, before it’s possible to ascertain “new normal” revenues & growth rates will be, to inform credible assumption inputs for a multi-year financial modelling exercise.

Short-Term SP Catalysts

·        Tomorrow’s Half Year Results: Should provide a clearer update on how some of the company’s growth initiatives are going, and interest in company. Would encourage any interested members to register for & dial-in to 11am results webinar, to get a feeling for the CEO.

·        Current Share BuyBack: The company’s current share buy-back is effectively on hold, due to a legal cap on how much stock they can buy back within 12 months (having bought back nearly 8.8% of the company’s shares around that time last year). They’ve flagged that the majority of the shares capacity they can potentially acquire, is likely to be able to start buying properly again from late March / early April 2025 onwards.

·        Pending Sale of Blocking-Stake/Cornerstone Interest in Company: Major Shareholder COG (who holds 21.4% of the company, after buying 19.9% from NAOS to successfully fight off Scotpac (who tried to take EPY over for 60c) some years ago prior to the RevRoof debacle, and who’s holding has been concentrated since by company buy-backs. COG has run into its own challenges has decided to put its major stake up for sale this past month or two. Given the sensitivity around a controlling stake in the company being auctioned off, EPY’s advisers Highbury have encouraged EPY to also enter the deal-room, and consider potentially putting the rest of the company up for sale, should the right kind of serious buyer come along & want to take the whole show private (i.e. COG’s stake & the rest). Earlypay hits the auction block, Highbury to seek bids.

·        Personally I’m hoping it won’t get taken out at these levels (i.e. T/O up to 30c) as I believe it has done all the hard work & laid all the tech, people & process es foundations from which to now grow from & really reap the benefits of its operating leverage & dramatically improved tech/partnerships etc over time.

·        I can conservatively easily see 27-30c (30%+) in next 12 months with its new scalable tech & distribution channels & steady growth & market re-rate on improved financials & growth trajectory. Of course a T/O could equally land at anytime (would be likely 30c or north) should a serious buyer emerge from the current sale process of COG’s strategic stake & the entire company.

Hope that assists anyone interested with getting up to speed on the company. Equally love to hear from any members who hold/held/have own thoughts on the company’s prospects.

Cheers

Randy