Wisr – Is it a good investment opportunity or is it on its last legs?

Welcome to Finance and Fury, The Saw What Wednesday Edition

– Question from Jack

This is going to be a bit of a Q&A style episode – he did a lot of research and sent it through – making my job easy on this one – so thank you for that

Jacks Question – I wonder what you think of WISR (WZR) as they have received a fair bit of media attention and commentator optimism.

Before we get into it – a Short Bio on Wisr:

1. Wisr is an Australian marketplace lender offering peer to peer lending services. It is known for being the first company of its type to be publicly listed in Australia – before 2018 – changed names from DirectMoney under a rebrand to Wisr
2. But back in 2015 listed on the ASX through a reverse takeover of Basper Ltd, raising $AU11.2m at 20c per share
3. Claims to be Australia’s first ‘neo lender’ offering cheaper loan rates (depending on credit history) than the big four banks.
4. Issues small loans only between $5k and $50k then on sells them. The primary activity is writing personal loans for 3, 5 and 7 year maturities to Australian consumers, then on-selling these loans to retail, wholesale and institutional investors.
   1. The business model relies on investors who what to buy these unsecured loans – get a yield on this
   2. Loans are about 7.95% fixed repayment
5. Uses smart app technology and a new aesthetic approach to lending (in an attempt to increase market share from ‘dinosaurs’ that hold 99% of it).

Run through the analysis: Not personal advice – just a breakdown

Financials (Quantitative)

1. Free cash flow – this is the lifeline of any company – after costs/taxes/etc are paid – what does the company have left?
   1. In this case – been negative for a long time – last time the company had positive cash flow was 2010
   2. Net losses have been growing over the years – -$2.2m in 2011 – to -$7.73m in 2019
   3. Doesn’t help that the outstanding shares have gone from 10m in 2010 to 790m in 2019
   4. This hurts the EPS – and potential to pay dividends – which is the next thing
   5. Operating margins and net profits at -252% and -257% respectively
2. EPS – The EPS is the profit divided by the number of shares, since the profit is negative there is no EPS.
   7. Earning: -$7.7m – so EPS is around -$0.013 – so for every dollar your put into this company, losing $0.076 p.a. based around last price of $0.17
   8. EPS is estimated to be positive in about 3-4 years – based around assumption of 67% earnings growth per annum – which is a huge forecast
3. ROE – Also hasn’t been positive since 2010 – had a massive loss since 2016 each year – been over 50% each year
   1. Future ROE: WZR is forecast to be unprofitable in 3 years – but based on massive assumptions
4. The PE – cant be done as the earnings per share is negative
5. Price to Book – WZR is overvalued based on its PB Ratio (15.3x) compared to the AU Consumer Finance industry average (2x).
   1. Nothing really intangible assets if the company goes bankrupt

What is keeping this company afloat – two factors – Jack points these out well 

1. Equity Raisings – Shareholder cash is keeping the company afloat. Risk of liquidation is low, more likely a slow death by continued losses and shareholders evaporating.
   16. Looking at the balance sheet – June 2019 – Shareholder equity – $16.77m = 90% of capital
2. Insider shareholdings – One shareholder group owned 44% in 2018. Recent surges don’t guarantee liquidity despite a high MC, especially since I am predicting this company is going nowhere by EOY, so likely at some point significantly downward to adjust for unjustified herd buying re livewire report –
   1. The Top 20 Shareholders of WZR hold 67.18% of shares on issue.
   2. Good Media Coverage – Media (livewire reporting) – I’m always a bit skeptical of fund managers saying a company will boom
      1. If they think it will – why not buy it themselves?
      2. Trying to change market perception to get large returns on the previously bought shares

Jack asks – Are there really signs of a continued turn around / market expansion? Maybe they have been around the bend and it is only going to get better, but why? Possible upsides?

1. Good points – Earnings vs Savings Rate: WZR is forecast to become profitable over the next 3 years, which is considered faster growth than the savings rate (1.1%).
2. Earnings vs Market: WZR is forecast to become profitable over the next 3 years, which is considered above average market growth.
3. High Growth Earnings: WZR’s is expected to become profitable in the next 3 years.
4. Revenue vs Market: WZR’s revenue (61% per year) is forecast to grow faster than the Australian market (4.2% per year).
5. High Growth Revenue: WZR’s revenue (61% per year) is forecast to grow faster than 20% per year.
6. Very low /no debt (relying on shareholders instead) – not always a good thing – shareholders want higher returns than debt raisings – but NAB has just provided them a third-party funding facility

Downsides

7. Jan 2020 raised $35 million through a placement and share purchase plan (30k max per shareholder), subject to shareholder – this is often done for additional funding for large projects, because nobody will lend to them (as debt is cheaper long term to raise capital off) or that they need money to stay solvent
   1. Given the tech is in place -probably the last one –
8. More opportunity for larger competitors (economies of scale) to offer cheaper rates in tougher markets were interest rates to drop further
   1. Focusing on the tech side of things rather than the fundamentals of the business model
   2. Gaining additional market share – may be hard and there is potential of legislation risks – competitors are the ones with market monopolies
9. Employees benefits of $5m, $2m larger than revenue
10. Future expectations are based on hopes – recent price gain from growth in customer base – A positive is they seem to have sold more loans up 281% to $68.9m (FY18 $18.1m) which will yield revenue in 2020. This seems to be a result of their positive remarketing and new technology aimed at (attracting) those in financial stress
    1. But this sector of lending is fairly unregulated at this stage

Unanswered questions

1. How are they going to maintain recent consumer intake from their new applications? The apps are already out there, are they really going to continuously steal more customers? This where my analysis could be undone, but even if it is and they gain market share I doubt it’s going to be dramatic and with continued losses I would expect a late-year downturn in the price.
2. What is going to happen to the 35million shares just raised?
3. 181million new shares on an MC without underlying profitability (70% of issue lost since conception).
4. Market psychology is with momentarily with them
5. Is a takeover or merger possible? – Always possible – could boost the price in the short term. Given the management team hold 30m shares expect them to want to sell them.

Jacks comment – Otherwise, poor fundamentals surviving only on shareholder positivity – I agree

However – look at Afterpay – pretty much same story – but thanks for peoples expectations – price went up

Summary breakdown 

1. Dividends are nil – Financial health is pretty poor
2. Value is bad – technically is priced in for massive future gains, even at $0.17 per share
3. Historical performance – 1 year performance is good after bound – but very volatile share – 5 year return is still -14% p.a.
4. Only upside is speculation of future performance – I don’t invest out of hope –
5. May go well – but remember – the current market price is based on this expectation = But if it doesn’t – prices will only go up if more people buy outside of the company and inside investors

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