I know, I know.

Big provision, what else is lurking in their book?

Looking at RevRoof's balance sheet as per the receiver's report filed to ASIC - PP&E to back equipment finance was likely there (at least a good chunk of it), ditto receivables to back invoice finance facility.

Based on this (and commentary at result) I would say that losses were in trade finance - which they made a foray into recently. Trade finance as a product is a bit more risky - but reasons to enter it sort of made sense. EPY lends to existing customers backed by inventory that arrives from overseas and gets transformed into receivables. Margin on the way in, margin on the way out.

My gut feeling is that in this case, they lent against inventory that never existed in the first place (oops).

Why were they so reckless lending $30m+ to a single counterparty?

Well, show me the incentive and I'll show you the outcome.

In this case, we had a CEO that is on his way out, who has (had?) shares and rumours of a takeover...

So that makes me a little less worried about whether there are some submerged logs in the book - other than on the Trade Finance side (hopefully we purged all that with the provisions that were taken).

Other issue may be NIM compression.

For all the talk it doesn't seem like headline interest rate on facilities is seeing any sort of uplift (historically EPY talked to 9.95% interest - last result implied 9.32%).

What does this say? Well, I imagine given the slowdown in housing credit growth the competition for business lending has heated up - giving them little scope to pass on interest (or maybe my calcs are wrong!). And it might get a little hotter with APS 112 - which has effectively reduced capital burden of lending to corporates and SMEs.

OK, so lets not give them any benefit of NIM expansion (even though they intimated they will refinance funding for a ~1% benefit).

Lets just take last half's NPAT (backing out RevRoof and provisioning) - circa $4.3m. Annualised $8.5m.

Lets put it on 8x (normally would give it 10x, but lets say it can't grow) - $68m.

Current market cap = $58m.

And they will release some capital in the refi - couldn't quite decipher what they were saying in the call but essentially replace some of the equity with Mez and release equity from equipment finance.

Lets say $20m from equipment finance ($134m x 15%) and $8m out of Invoice Finance ($165m x 5%).

Then there's a question of what of the $64m cash in balance sheet is actually operating cash. Based on above - at least $38m of it (soon to be released). Lets just give them nothing for it (could be $26m there?).

So - $20m + $8m + $65m = $93m. Less provisions of $12.8m (real cash as you have to replace equity - but could be CEO tucking away some future earnings) we get around $80m or $0.28 - based on pretty conservative assumptions vs the $0.21 it's trading at today.

Catalysts? Re-fi of debt should give it a good pop (esp. if there's some equity released).

There may be some things wrong with my assumptions above (or I may have missed something) - but margin of safety seems pretty comfortable. Or the whole thing could blow up - only know if you have been lending prudently in a downturn! Willing to take the risk (at least until the refi).