Someone on another investment platform asked this question in relation to QFE - "Why is Aussie growth stagnating at all?"

My response is as follows;

The answer to this question may be pretty simple, given one's understanding of QFE's business model.

For those that do not understand QFE;

Echoing a report I have written on the stock previously - "QFE acts as a working capital machine for professional services firms (particularly accounting & law firms)."

Unless you'd been living under a virally-suppressant rock for the past 18 months then you would understand the financial impact of covid-19 and the fiscal response to such.

The Australian government [as similar to their US counterparts] combined with the RBA have pumped an enormous amount of capital into the economy in attempt to stimulate and revive economic growth and investment. The increase in money supply is unprecedentedly immense when compared to events such as the GFC in 2008. (please see graph for reference).

If we take two-steps back again we need to understand what QFE offer, and who their customers are.

QFE offer working capital/funding for those that cannot afford to pay for professional services outright and hence their customers are individuals (through professional services firms) who have been being handed cash fresh from the printer of the Federal government & RBA.

Given that their customers are now 'cash-strapped', they decide that they no-longer require QFE's services (loans etc).




So in conclusion - "Why is Aussie growth stagnating at all?"

My answer would be; it has something to do with the one in one hundred year event we are experiencing and the fiscal response to such an event.
 

DISC - NOT HELD.

QFE is a stock I had followed in the past, sold & now am revisiting due to the sharp fall off the share price.

The QFE business model described as follows;

• QFE is a working capital machine for professional services firms (particularly accounting & law firms).
• Their revenue model is mostly from the interest charged on loans offered to these accounting & law firms.
  • Secondary points of revenue include "monthly hosting fees, credit card processing etc"
• The loans that QFE issue to such firms is underwritten by the firms themselves. If an individual defaults on their loan to see a lawyer, the law firm is contracted to buy back the loan from QFE.

Bull Case, refined by a few simple points;

• High insider ownership. (& Founder led until very recently).
• A sharp fall off in the share price due to short term impacts.
  • QFE users numbers in Australia detracted massively over the lockdown period, which initially is very concerning for a 'growth' company. 
  • The government stimulus heavily blunted the need for QFE's services, as the cash handouts to QFE's customers acted as sufficient working capital. Since the stimulus has subsided the user numbers to my belief have risen.

Bear case;

• Complicated business model that is very working capital intensive and requires a lot of debt funding. This leaves the company very vulnerable to interest rate movements.
• Unprofitable & hard to estimate when this is likely
• Illiquid.

I'm particularly interested in looking at this stock again primiarly because it has been a 'covid loser' and thus I believe may have been oversold on short term news. The stock is down over 67% from its highs.

** I do not own QFE shares, but am beginning to conduct more research on them again.

Quickfee have completed their capital raising of $17.5m to aid with their new "interest free product" - see other straws of mine.

The SPP was oversubscribed, reflecting both retail & institutional investor interest in the company.

To supplement this, QFE featured on Auzbiz's 'The Call' and received 2 'buy' recommendations from the experts.

https://asx.api.markitdigital.com/asx-research/1.0/file/2924-02294389-6A1001377?access_token=83ff96335c2d45a094df02a206a39ff4

Bruce presented yesterday at Market Eye's 'Techopps' event.

• he noted that despite the poor Q1 result for Australian lending (not US), the first 2 weeks of October have seen a "significant change" in lending and the level of enquiry for QFE's services.
• He further gave evidence of the impact jobkeeper has had for professional services firm as Grant Thornton reported to the AFR - record levels of cash inflows (which translates to a lack of need for QFE's services)
  • (link below)
    • https://www.afr.com/companies/professional-services/grant-thornton-promotes-partners-despite-pandemic-20200619-p554cvhttps://www.afr.com/companies/professional-services/grant-thornton-promotes-partners-despite-pandemic-20200619-p554cv
• Again more questions surrounding default levels during the recession which hints that people still do not understand the business model.
  • (he mentioned default on lending was less than 0.5%).

*I don't own QFE shares as I am waiting for further evidence of the growth in lending before I get invovled in this business, though I do like the business model and the direction Bruce is taking shareholders.

Interesting quarter ahead!

Quarter 1 for FY2021 update notes;

• US market lending with very strong growth of 91% for pcp. 
  • $2.2m to $4.1m QoQ growth
  • Active firm users in the US up 45 to 457 total firms (11%)
• Lending in Australia has fallen 41% pcp !!!!
  • $10.9m down to $6.4m QOQ
  • This is very concerining at first glance, however the growth pre covid was strong.
  • They expect this negative growth to reverse and the impact of jobkeeper payments to SME's has led to them no longer needing to finance loans to due to cash flow positivitiy.
  • As jobkeeper unwinds, SME's will no longer have this guaranteed cashflow.
  • Still something to keep an eye on in future quarters
• QFE have also appointed a new CFO, Simon Yeandale
  • Simon has experience with other SaaS Fintech firms (OML, 3PL)

Overall, US growth is absolutely pumping which is a good sign, but the growth stalling in Aus is concering. SME's will continue to receive government stimulus, even when jobkeeper ends through tax cuts.

If these stimulus measures mean's they don't need to finance services to QFE then growth will simply tail off.

Attatchment;

https://www.asx.com.au/asxpdf/20201009/pdf/44nj5lrfjwxyp5.pdf

After looking into the 2020JH reports, I have found the following;

• Bruce Coombes (CEO & MD) - 12.5%
  • with a further 3m in options
• Dale Smorgon (Non exec director) - 10.5%
  • 300k options
• Barry Lewis (non exec chair) - 0.45%

Very nice to see management are strongly aligning themselves with shareholders.

For me, this is in my top 5 "MUST-HAVE's" for a company before i bother researching further.

Rapid growth from sections of both the US & Australian operations, however the previous reported quarter hinted a tail of in growth due to COVID.

Bruce (& I also agree with this) sees COVID as pushing a major tailwind for this business, with typical loan defaults etc rising during recessionary periods, prompting the need for professional services firms to heed the guarantee of clientele.

I think the listing of the new 'interest free' product will definately push back the "inflexion point" for the company as they will scale up costs on customer acquisition, marketing sales etc. (see CanadianAussie's straw on this).

Estimating profitability in ~4 half years of results.

A real hidden gem, as people cannot comprehend this business model and the lack of competition in the space. Once they establish themselves with the firms they service, there is a real chance to build a moat and guarantee some ARR. For now, Bruce and the team will continue to scale the business and win new sales.

Futhering from myself & @CanadianAussie's straw's on the QFE capital raise;

Bruce hosted a Q&A with a small presentation on the new 'interest-free' product QFE are releasing to market on October 15th.

What..?

• A new interest free product where QFE uses split-it's (SPT) patended techonology to provide professional service providers and their clients with interest free loans.
• QFE charge 4.99% of the loan taken on and pay SPT a part of this for using their technology (Bruce said the could not disclose parts of the SPT deal)
• Risk is mitigated through SPT's credit card 'Pre-authorisation' system, whereby money is set-aside automatically to repay the loan (even in the case the card is cancelled etc)

New market

• This new product massively expands QFE's target market, with them allowing to partner with ANY professional service providing firms, not just law & accounting as previous.
• Firms with >1m revenue can now be partnered with, growing market in the US by 2500%.

SPT Deal

• Financials and length of this deal is disclosed.
• The deal is initially exclusive but only for a limited time
• Bruce hinted at a 'non exclusive' deal continuing on after the period of exclusivity expires.

17th September 2020

QFE has entered a trading halt post annoucement of a strategic partnership with Splitit (SPT) and a subsequent capital raise to help with the launching of a new interest free product in the US & Australia.

$17.5m being raised with the funds being used for the following;

• A$2.8 million – Significant scale up of team for customer acquisitions, predominantly in the US

• A$2.0 – Research and development (R&D) for future product releases

• A$12.0 million – Funding for expected increased lending from “Interest Free” product

• A$0.7 million – Transaction costs

One to watch!