By Steven Ralston, CFA
IEG Holdings Corp. (IEGH) is a consumer finance company that offers unsecured consumer loans (under the brand name “Mr. Amazing Loans”) to individuals in 19 states via an online platform (mramazingloans.com). The company provides $5,000 and $10,000 personal consumer loans over a term of five years in Alabama, Arizona, California, Florida, Georgia, Illinois, Kentucky, Louisiana, Maryland, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oregon, Pennsylvania, Texas, Utah and Virginia. Investment Evolution Corp (a subsidiary of IEG Holdings) holds state licenses and/or certificates of authority to lend in these 19 states. Over the intermediate-term, management plans to offer loans in 25 states, which would cover approximately 75% of the US population.
IEG Holdings is well positioned for organic growth, leveraging its unique presence in the faster-growing unsecured personal loan market and its concentration on differentiated, higher-margin products. The company’s online loan application portal increases the potential to scale operations and enhances margins. Brick-and-mortar businesses add costs, such as rent payments and salaries/wages of branch supervisors/employees.
Through the effective execution of management’s business plan, including the online loan origination platform, effective supporting marketing programs and the pursuit of additional state licenses, IEG Holdings has achieved impressive growth of its loan portfolio. The company should benefit from its disciplined underwriting process, which should deliver a high margin loan portfolio with relatively low underwriting credit risk.
IEG concentrates on providing 5-year $5,000 and $10,000 loans, which are the sweet spots that maximize return and minimize potential credit losses. Customer-lead acquisition costs and shorter-term loans (less than 5 years in duration) reduce the economic attributes of underwriting unsecured consumer loans. Also, credit risk significantly increases for loans greater than $10,000.
On November 3, 2016, IEG Holdings released an update to the company’s corporate strategy. Strategically, CEO Paul Mathieson is exploring a full range of alternatives for the purpose of increasing stockholders’ value. A major step towards becoming profitable is that Paul Mathieson agreed to forgo his 2016 bonus and also entered into a new consulting for 2017 which reduced his annual base compensation from $1.0 million to $1, which should reduce operating expenses by 16%.
During 2017, management intends to focus on increasing the company’s capital base in order to finance further growth in the loan book and on cutting costs with the aim of becoming cash flow positive and profitable.
Management has provided earnings guidance for the first quarter of 2017. Due to the anticipated significant cost reductions in compensation, consulting fees and other operating expenses, management forecasts that IEG Holdings will report a net profit (albeit small) and positive operating cash flow for the first quarter of 2017. In view of the anticipated improvement in IEG’s financial position, management intends to pay a small dividend to shareholders and anticipates paying regular quarterly dividends thereafter.
IEG Holdings has developed the enterprise functions to support scalability, including technology-based customer acquisition, risk-controlled loan generation, capital funding and regulatory compliance. The company’s business model is expected to drive growth through geographic expansion (through being granted additional state licenses) and underwriting an increasing amount of loans (through a low cost customer acquisition approach and a highly efficient underwriting process). Given the company’s track record, we expect IEG Holding to be able to continue finance its businesses expansion through various sources of capital funding.
Loan Book Growth
After IEG Holdings launched the Mr. Amazing Loans online loan origination platform in mid- 2013, loan volumes grew dramatically. In the first year of the online platform’s operation (June 30 2013 to June 30, 2014), total cumulative loan originations increased over 450%from$237,000 to approximately $1.32 million. In the second year (June 30 2014 to June 30, 2015), loan originations increased over 580% from to $9.08 million.
IEG Holdings continues to generate year-over-year (YOY) loan and revenue growth, key metrics indicative of the company’s potential. In the third quarter of 2016, total revenues increased 5.1% YOY driven by 7.3% growth in loans receivable.
The strong growth in loan originations was not only a result of the online platform, but also the successful execution of other growth initiatives. Several effective marketing programs supported the effectiveness of the online application portal, including online advertising, partnering with online lead generators and direct mail advertising. Loan growth was also significantly enhanced by pursuing additional state licenses.
Furthermore, management also positioned the company to address and benefit from certain consumer needs, namely
1) IEG focuses on the under-banked marketplace of non-prime consumers requiring affordable credit and
2) the company offers a considerably lower cost alternative to payday loans
And, of course, management secured funding to maintain and expand operations as well as finance the origination of loans.
Consumer lending companies fall into several business line categories: traditional lenders (secured loans), marketplace lenders, credit card issuers, educational finance companies, payday lenders, middle market commercial lenders, non-prime consumer loans, etc. Even though IEG’s direct competitors in the state-licensed, personal loan space are companies are companies like OneMain Financial (OMF) and World Acceptance Corporation (WRLD), the company is in a unique life cycle position. IEG Holdings has exhibited dramatic loan book growth and is on the verge of positive operating cash flow and profitability.
Larger, profitable lenders tend to trade at low P/S ratios usually in the 0.7 and 2.1 times revenues; however, higher growth potential marketplace lenders trade in a higher range (7.8 to 18.1 times revenues). Marketplace lending category is composed of companies that provide an online marketplace where investors and borrowers can connect. The companies offer a technology-based platform that automates the borrower application process and provides loan servicing, and at the same time provides analytical tools that enable investors to decide whether to add the loan to their portfolios.
IEG Holdings is still in an early phase of its life cycle with the loan originations volume on a high growth trajectory. The company should trade at a much higher multiple reflecting the company’s potential. It is difficult to find a comparable lending company today with revenues in the $2-to-$3 million range with the same upside potential as IEG Holdings. However, in the past, Lending Club (LC), Main Street Capital (MAIN), Manhattan Bridge Capital (LOAN) and NewStar Financial (NEWS) were in roughly the same position as lenders with a particular focus but with significant loan portfolio growth potential. These stocks all attained Price-to-Sales valuation levels over 9.0 times and one as high as 51.8 times.
Utilizing annual revenues of $5.0 million (our estimated revenue level for profitability with the CEO receiving normal compensation), which we expect the company to attain organically by 2020, and with the expectation that IEG Holding stock can attain a P/S ratio of 20.0 at that time, we employ a net present value (NPV) calculation arriving at a price target of $8.50 for IEGH.
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