Before I introduce today’s company, consider the economics of the average bank.
The average bank keeps about $9 of equity for every $100 it has lent out or invested. It might earn something like a 3% net interest margin, write off a little over half a percent of its loans every year, and it might end up with an ROE of 10-12% at the end of the year. Banks in general earn fine returns (in the good times — banks earn their returns by stacking a thin spread on top of 11x leverage, dependent on depositors staying calm and the loan book behaving as expected). Across the universe, the market might pay a little more than book for the average bank, give or take.
The company I’m writing about today is a lender too, but it’s not a bank. It trades at a lower multiple than your average bank, and just by the numbers (we’ll get to the qualitatives later), it ranks superior:
- Its net interest margin was 15.5% in the latest half-year report.
- Equity is 36% of assets, so it runs at something like a quarter of a bank’s leverage.
- Its loans last ~10 months, so there’s little duration risk. It can reprice the whole book within a year.
- Most of these loans are with recourse to the partner who brought the borrower in, so if the borrower stops paying, the partner is on the hook. And even when that fails, the loans are backed by collateral that turns back into cash within months (more on how that works later).
- Over the last 7 years, bad loans have cost something like 0.4% of the loan book per year on average.
- It earned a 16% ROE (annualized) in the last half-year report.
- The company is consistently profitable every single year. (I got data for the past 14 years.)
What would you pay for a lender like that? 1.5x book? What if I told you it’s an illiquid nanocap? 1x book, maybe, to be more conservative?
Well, this one trades at ~0.6x book and <4x earnings. And it pays you a ~6% dividend.
Today’s company is…