Investment Enova International Research I Presentation (NYSE: ENVA) Month Sector: Day, Financials M 20XX Senior Analyst: Benjamin Smith Junior Analysts: Alejandro Mendez, Eric Rivera, Gia Sun, Zack Zhang Spring 2018 1
Valuation Summary Recommendation Summary Company (Ticker) ENVA Current Trading Price (04-15-2018) $22.65 Recommendation Target Price $26.55 Upside Potential 17.2% Recommendation BUY 2
Agenda Industry Overview Company Overview Competitive Advantage Trend Analysis Risk Analysis Valuation Summary/Recommendation 3
Specialty Finance Industry Overview Specialty finance is any financing activity that takes place outside of the traditional banking system. Specialty finance firms are usually non-bank lenders that make loans to consumers and businesses that cannot otherwise obtain financing. Financials Diversified Financials Consumer Finance FirstCash NYSE: FCFS Market Cap: 3.75B Regional Management NYSE: RM Market Cap: 366.96M Specialized Finance Blackhawk Network Holdings NASDAQ: HAWK Market Cap: 1.95B Elevate Credit NYSE: ELVT Market Cap: 313.93M LendingClub NYSE: LC Market Cap: 1.59B EZCORP NASDAQ: EZPW Market Cap: 542.97M William Blair, Bloomberg Markets, MSCI, S&P Global 4
Industry Trends Economic trends point to a stable growth environment for consumer lending and have led to the return of consumer leverage Aggregate household debt balances have risen to a new peak and are predicted to rise further Aggregate household debt is forecasted to grow 3.0% from 2018 to 2023. Economists predict household debt will reach $16.6 trillion from $14.3 in just five years The average personal loan debt has increased by a 8 year CAGR of 146% from 2011 to 2017 Technology will continue to attract subprime borrowers and allow firms to reduce risk Lending through mobile devices allows lenders to accumulate vital information that is used to reduce risk of default This can range from information gathered through the borrower s Facebook account to their contact information in their phone Pew Research Center, Lending Times, Center for American Progress 5
Industry Trends Changing U.S. demographics will create more demand for subprime non-traditional lenders Certain racial, ethnic, and income groups are less likely to participate in the traditional consumer finance system Approximately 28% of American households either lack bank accounts or are not fully integrated into the financial system Those who do not have access to bank accounts are predominantly non-white The high cost of maintaining a bank account and an overall lack of trust in banks has discouraged many lower-income households from opening an account These racial and ethnic groups will become a larger percentage of the U.S. population The U.S. population is projected to become majority minority by 2044 The Hispanic population will than double by 2060 at a growth rate of 129% The Brookings Institution, U.S. Census Bureau, FDIC, Fortune, Center for American Progress 6
Cumulative Originations (Millions USD) Company Overview Enova International is a Chicago-based specialty finance company that utilizes technology to develop innovative financial products for individuals and businesses Formed in 2014 as a spinoff of Cash America Online lending platform targeting subprime borrowers Uses advanced proprietary analytics to make realtime lending decisions Conducts business in the US, UK, and Brazil Focused on growth and product diversification Recently entered the commercial lending business Share repurchase program signals confidence Market Cap Enova International (ENVA) $759 million 2017 Revenue $844 million Debt-to-Capital 51% ROA 2.7% ROE 11.2% Credit Rating (Moody s) Caa1/Speculative 50 45 40 35 30 25 20 15 10 5 0 Six growth business proving various credit products to consumers and businesses drive revenue 45% Increase in Cumulative Originations Over Last Decade 3.2 5.7 9.1 13.9 17.9 22.5 27.4 31.9 35.5 39.3 43.2 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Enova International, Chicago Tribune, The Wall Street Journal 7
Business Model Attracting subprime borrowers No need to travel to a physical location Lax requirements: 18+ years old, US citizen, driver s license, etc. Fast approval process and immediate financing Proprietary technology is used to assess risk and provide financing as quickly as possible Subprime Profile $41,000 Annual Income 30% Homeowners 560-600 FICO Score Range Scoring models decide whether to approve financing transactions and structure the amount and terms of the financing in accordance with jurisdiction specific regulations License agreements give lenders access to personal data including contact information, phone and text records, and smartphone application data used in the approval process Potential customer submits an application Credit decision is quickly provided Loan is funded the same or next day Enova International 10-K, Elevate UBS Investor Conference Presentation, Regional Management Corp. 8
Competitive Advantage First-Mover Advantage Started providing payday loans to subprime borrowers through the internet in 2004 Established technological leadership in the form of a real-time lending decision model More than a decade of data and experience within subprime lending Superior Data Analytics 50+ person analytics group continuously refines underwriting system 13% charge-off rate vs Elevate Credit s 52% exemplifies Enova s superior data analytics New analytics service Enova Decisions being used to further diversify revenue streams Strong Management CFO joined the firm in 2016 and was previously CRO of Discover Financial Services CEO was head of optionsxpress when it was sold to Charles Schwab for $1.4B Management has laid out a clear growth plan for the future Enova International, Elevate Credit 9
Trend 1: Product diversification reduces risk and paves the way for future growth Enova has moved away from payday loans as a way of reducing risk associated with regulatory changes and gaining new market share All domestic growth in 2017 was driven by installment loans and line of credit accounts Product Description Size Term Interest (APR) Short-term loans Line of credit accounts Installment loans Small-principal loan usually repaid upon customer s next payday Allows customers to draw on a line of credit in increments Longer term loans that require the outstanding principal balance to be paid down in multiple installments $150 - $3,500 7-90 Days 200% - 650% $2,000 2-10 Months 300% $1,000 - $12,000 2-60 Months 150% - 200% Enova International 10
Trend 2: Securitization reduces risk and increases liquidity Securitization is the practice of pooling various types of contractual debt such as mortgages, auto loans or credit card debt obligations and selling their related cash flows to third party investors as securities. First spoke about securitization as a way to increase liquidity in 2015 Securitization Facility 2016-1 $275m Jefferies Securitization increase liquidity and decreases risk by selling receivables in exchange for cash Securitization Facility 2016-2 Loan Loan $20m Redpoint Capital Enova can use cash earned from securitization to originate new loans Loan Loan Loan Loan Enova pools a group of receivables that it has originated Loan Enova sells this group of receivables in exchange for cash Allows Enova to put more focus on origination and less focus on future receivables May decrease the cost of raising capital due to the offloading risk Enova International, GM Financial 11
Risk Analysis Restrictive Regulation The use of personal data for credit underwriting is highly regulated New regulations could increase compliance costs, restrict lending capabilities, and eliminate the ability to offer certain products Consumer advocacy groups consistently pressure legislators Liquidity Originating longer-term loans reduces liquidity Lower liquidity makes it more difficult to raise capital In the event of a financial crisis or credit freeze like in 2008, Enova would be at high risk of bankruptcy Security Breaches SEC stated that cyber security is largest threat to financial system in 2016 Security breaches are detrimental to consumer trust and brand name Protection against cyber attacks result in increased costs Enova is exposed to a variety of risks ranging from the constant development of new regulation to adverse market conditions. However, the firm s utilization of securitization and its initiatives to diversify revenue streams address these risks head-on. Enova International Form 10-K, Enova International Form 10-Q, Reuters 12
Comparable Companies Analysis Comparable Companies Analysis LTM data (12-31-2018) Company Ticker EV Market Cap Sales Book Value TBV P/BV P/TBV P/S Enova International ENVA 1,491 759 844 286 10 2.7 x 74.4x 0.9x Elevate Credit ELVT 725 314 673 96 79 3.3 x 4.0x 0.5x Regional Management RM 939 386 249 245 230 1.6 x 1.7x 1.5x World Acceptance WRLD 1,184 904 532 482 464 1.9 x 1.9x 1.7x FirstCash FCFS 4,222 3,934 1,051 1,479 551 2.7 x 7.1x 3.7x OneMain Holdings OMF 18,086 4,023 3,756 3,287 1,387 1.2 x 2.9x 1.1x High 3.3x 7.1x 3.7x Mean 2.1x 3.5x 1.7x Median 1.9x 2.9x 1.5x Low 1.2x 1.7x 0.5x P/BV P/TBV P/S Book Value $286m Tangible Book Value $10.2m LTM Sales $844m Implied Price Target $18.10 Implied Price Target $1.07 Implied Price Target $42.94 Upside (Downside) % -20% Upside (Downside) % -95% Upside (Downside) % 90% P/BV = Price/Book Value P/TBV = Price/Tangible Book Value P/S = Price/Sales 13
DCF Valuation Forecasted 2018 2019 2020 2021 2022 EBIT $ 153.88 $ 177.08 $ 215.37 $ 260.54 $ 317.79 - Taxes (35.16) (40.46) (49.21) (59.53) (72.61) $ 118.72 $ 136.62 $ 166.16 $ 201.01 $ 245.17 + D&A 14.87 15.52 16.39 17.42 18.44 - CAPEX (18.47) (19.18) (20.56) (21.83) (23.46) - Δ in NWC (79.75) (97.55) (110.95) (115.38) (113.67) Unlevered FCF $ 35.36 $ 35.42 $ 51.04 $ 81.22 $ 126.48 Net Present Value $247.10 Cost of Debt: 5.79% Cost of Equity: 10.91% WACC: 8.28% Terminal Growth Rate: 2.20% Exit Multiple: 7.00x Exit Multiple Method EBITDA Multiple 7.00x Undiscounted TEV $ 2,354.70 Discounted TEV $ 1,581.65 DCF Value $1,828.75 Equity Value $1,097.44 Share Price $ 32.74 Implied Growth Rate 2.76% Perpetuity Growth Method Growth Rate 2.20% Undiscounted TEV $ 2,124.64 Discounted TEV $ 1,427.12 DCF Value $1,674.22 Equity Value $942.91 Share Price $ 28.13 Implied Exit Multple 6.32x Key Assumptions Revenue from payday loans decrease steadily Revenue from LOC accounts and installment loans/rpas continue to increase Securitizations decrease AR and changes in NWC $20m stock repurchase will take place from 2018 to 2020 SG&A as a % of sales will continue to decrease as originations increase 14
Recommendation Summary Recommendation Summary Company (Ticker) ENVA Current Trading Price (04-15-2018) $ 22.65 Recommendation BUY Target Price $ 26.55 Upside Potential 17.2% Recommendation BUY Valuation Summary Method Price Weight Discounted Cash Flow Perpetuity Growth Method $ 28.13 35% Exit Multiple Method $ 32.74 35% Comparable Company Analysis P/BV $ 18.10 5% P/TBV $ 1.07 5% P/S $ 42.94 10% Target Price $ 26.55 Growth industry with favorable trends Strong track record of product innovation and increased originations Experienced management with clear plans for further diversification and utilization of favorable financing methods 15
Thank You 16
Appendix 17
Appendix: Income Statement Historical Forecasted 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Revenue 765.3 809.8 652.6 745.6 843.7 976.3 1,115.4 1,274.1 1,442.1 1,633.3 % growth 5.8% -19.4% 14.2% 13.2% 15.7% 14.3% 14.2% 13.2% 13.3% COGS (excl. D&A) (315.1) (266.8) (216.9) (328.0) (396.6) (462.2) (536.2) (600.7) (659.2) (722.3) % of Revenue 41.17% 32.94% 33.23% 43.99% 47.01% 47.34% 48.07% 47.15% 45.71% 44.23% Gross Profit 450.3 543.1 435.7 417.6 447.1 514.1 579.2 673.4 782.9 910.9 % Margin 58.8% 67.1% 66.8% 56.0% 53.0% 52.7% 51.9% 52.9% 54.3% 55.8% SG&A (290.5) (309.3) (293.0) (280.6) (298.3) (345.2) (386.5) (441.5) (504.7) (574.6) % of Revenue 37.96% 38.19% 44.89% 37.63% 35.36% 35.36% 34.65% 34.65% 35.00% 35.18% EBITDA 159.7 233.7 142.8 137.0 148.8 168.9 192.8 231.9 278.1 336.4 % Margin 20.9% 28.9% 21.9% 18.4% 17.6% 17.3% 17.3% 18.2% 19.3% 20.6% Depreciation (17.1) (18.7) (18.4) (15.6) (14.4) (14.9) (15.5) (16.4) (17.4) (18.4) Amort. of Intangibles - - - - - - - - - - Total D&A (17.1) (18.7) (18.4) (15.6) (14.4) (14.9) (15.5) (16.4) (17.4) (18.4) Other Operating Expenses (1.2) (0.0) (1.0) 1.6 (22.5) (0.2) (0.2) (0.2) (0.2) (0.2) Total Operating Expenses (308.9) (328.1) (312.3) (294.6) (335.2) (360.2) (402.2) (458.0) (522.3) (593.2) Operating Income (EBIT) 141.4 215.0 123.4 123.0 111.9 153.9 177.1 215.4 260.5 317.8 % Margin 18.5% 26.5% 18.9% 16.5% 13.3% 15.8% 15.9% 16.9% 18.1% 19.5% Interest Expense (19.8) (38.5) (52.9) (65.6) (74.0) (60.1) (60.1) (60.1) (60.1) (60.1) Interest Income - - - - - - - - - - Net Interest Inc. (Exp) (19.8) (38.5) (52.9) (65.6) (74.0) (60.1) (60.1) (60.1) (60.1) (60.1) Other Non-Operating Income - - - - - - - - - - EBT Excl. Unusual Items 121.6 176.5 70.5 57.4 37.9 93.8 117.0 155.3 200.5 257.7 % Margin 15.9% 21.8% 10.8% 7.7% 4.5% 9.6% 10.5% 12.2% 13.9% 15.8% Unusual Items - - - - - - - - - - EBT Incl. Unusual Items 121.6 176.5 70.5 57.4 37.9 93.8 117.0 155.3 200.5 257.7 Income Tax Expense (43.6) (64.8) (26.5) (22.8) (8.7) (21.44) (26.7) (35.5) (45.8) (58.9) Earnings from Cont. Ops 78.0 111.7 44.0 34.6 29.2 72.4 90.3 119.8 154.7 198.8 Earnings from Discounted Ops. - - - - - - - - - - Extraord Item & Acct. Change - - - - - - - - - - Net Income to Company 78.0 111.7 44.0 34.6 29.2 72.4 90.3 119.8 154.7 198.8 Minority Int. in Earnings - - - - - 0 0 0 0 0 Net Income 78.0 111.7 44.0 34.6 29.2 72.4 90.3 119.8 154.7 198.8 % Margin 10.2% 13.8% 6.7% 4.6% 3.5% 7.4% 8.1% 9.4% 10.7% 12.2% 18
Appendix: Balance Sheet Historical Forecasted 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Cash And Equivalents 47.5 75.1 42.1 39.9 68.7 116.6 169.6 238.3 337.1 486.3 Accounts Receivable 303.5 323.6 434.6 561.6 704.7 810.3 914.7 1,032.0 1,153.6 1,273.9 Other Recievables - 16.6 25.6 19.5 27.9 23.2 26.5 30.3 34.3 38.9 Total Receivables 303.5 340.2 460.2 581.1 732.6 833.5 941.2 1,062.4 1,188.0 1,312.8 Restricted Cash - 7.8 7.4 26.3 29.5 25.2 29.2 32.7 35.9 39.3 Prepaid Exp. - - - - - - - - - - Other Current Assets 8.7 - - - - - - - - - Total Current Assets 359.6 423.1 509.6 647.3 830.8 975.3 1,140.0 1,333.3 1,561.0 1,838.4 Gross Property, Plant & Equipment 39.4 41.3 49.8 55.2 59.0 77.5 96.7 117.2 139.1 162.5 Accumulated Depreciation (21.5) (30.1) (26.0) (31.7) (37.0) (51.9) (67.4) (83.8) (101.2) (119.6) Net Property, Plant & Equipment 17.9 11.2 23.8 23.5 22.0 25.6 29.3 33.5 37.9 42.9 Long-term Investments - 6.7 6.7 6.7 6.7 6.7 6.7 6.7 6.7 6.7 Goodwill 255.9 255.9 267.0 267.0 267.0 267.0 267.0 267.0 267.0 267.0 Other Intangibles 21.5 22.9 30.8 29.0 30.8 30.8 30.8 30.8 30.8 30.8 Deferred Tax Assets, Current & LT 30.9 25.4 - - - - - - - - Deferred Charges, LT - - - - - - - - - - Other Long-Term Assets 6.3 15.1 2.6 4.3 2.1 7.2 7.2 7.2 7.2 7.2 Total Assets 692.1 760.2 840.5 977.9 1,159.4 1,312.7 1,481.0 1,678.6 1,910.6 2,193.0 Accounts Payable 18.7 25.5 25.7 25.4 25.6 38.4 44.5 49.9 54.7 60.0 Accrued Exp. 19.3 22.5 12.7 19.4 26.1 23.4 26.2 30.0 34.3 39.0 Curr. Income Taxes Payable 0.0 6.8-0.3-0.5 0.6 0.8 1.1 1.4 ST Debt - - 3.0 3.0 3.0 Other Current Liabilities 11.6 9.3 30.7 23.8 22.4 31.7 36.7 41.1 45.2 49.5 Total Current Liabilities 49.6 64.1 72.1 72.0 77.1 94.0 108.1 121.8 135.2 149.9 Long Term Debt 424.1 494.2 541.9 649.9 788.5 788.5 788.5 788.5 788.5 788.5 Capital Leases & Current Portion - - - - - - - - - - Unearned Revenue, Non-Current - - - - - - - - - - Def. Tax Liability, Non-Curr. 45.3 48.0 20.5 14.3 12.1 12.1 12.1 12.1 12.1 12.1 Other Non-Current Liabilities 0.1 - - - - - - - - - Total Liabilities 519.1 606.2 634.6 736.2 877.8 894.6 908.8 922.5 935.9 950.5 Common Stock - - - - - - - - - - Additional Paid In Capital - 0.3 9.9 18.4 29.8 29.8 29.8 29.8 29.8 29.8 Retained Earnings 169.9 156.9 200.9 235.5 264.7 401.0 555.3 739.1 957.7 1,225.5 Treasury Stock - - (0.2) (0.6) (5.7) (5.7) (5.7) (5.7) (5.7) (5.7) Comprehensive Inc. and Other 3.1 (3.2) (4.6) (11.6) (7.1) (7.1) (7.1) (7.1) (7.1) (7.1) Total Common Equity 173.0 154.0 206.0 241.7 281.7 418.0 572.3 756.1 974.7 1,242.5 Minority Interest - - - - - - - - - - Total Equity 173.0 154.0 206.0 241.7 281.7 418.0 572.3 756.1 974.7 1,242.5 Total Liabilities and Equity 692.2 760.2 840.5 977.9 1,159.4 1,312.7 1,481.1 1,678.6 1,910.6 2,193.0 Balance Check OK OK OK OK OK OK OK OK OK OK 19
Appendix: Projected Revenue by Product Short-term loans Historical Forecasted 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Volume 389.7 257.2 204.9 196.3 197.4 187.5 178.2 165.7 167.3 167.3 Price 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Total 389.7 257.2 204.9 196.3 197.4 187.5 178.2 165.7 167.3 167.3 % Growth -34.0% -20.3% -4.2% 0.6% -5.0% -5.0% -7.0% 1.0% 0.0% Volume Growth -34.0% -20.3% -4.2% 0.6% -5.0% -5.0% -7.0% 1.0% 0.0% Price Growth 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Line of credit accounts Historical Forecasted 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Volume 170.5 305.1 185.5 220.5 262.8 328.5 394.1 473.0 543.9 625.5 Price 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Total 170.5 305.1 185.5 220.5 262.8 328.5 394.1 473.0 543.9 625.5 % Growth 79.0% -39.2% 18.8% 19.2% 25.0% 20.0% 20.0% 15.0% 15.0% Volume Growth 79.0% -39.2% 18.8% 19.2% 25.0% 20.0% 20.0% 15.0% 15.0% Price Growth 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Installment loans, RPAs and Other Historical Forecasted 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Volume 205.1 247.6 262.2 328.9 383.6 460.3 543.1 635.5 730.8 840.4 Price 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Total 205.1 247.6 262.2 328.9 383.6 460.3 543.1 635.5 730.8 840.4 % Growth 20.7% 5.9% 25.4% 16.6% 20.0% 18.0% 17.0% 15.0% 15.0% Volume Growth 20.7% 5.9% 25.4% 16.6% 20.0% 18.0% 17.0% 15.0% 15.0% Price Growth 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total Revenues Historical Forecasted 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Short-term loans 389.7 257.2 204.9 196.3 197.4 187.5 178.2 165.7 167.3 167.3 Line of credit accounts 170.5 305.1 185.5 220.5 262.8 328.5 394.1 473.0 543.9 625.5 Installment loans, RPAs and Other 205.1 247.6 262.2 328.9 383.6 460.3 543.1 635.5 730.8 840.4 Total 765.3 809.8 652.6 745.6 843.7 976.3 1,115.4 1,274.1 1,442.1 1,633.3 20
Appendix: Diversification Charts Revenue by Product Type 2009 0% 2% Revenue by Product Type 2017 22% 31% 98% 47% Line of credit Installment and RPAs Short-term Line of credit Installment and RPAs Short-term Gross AR by Product Type 2009 0% 3% 97% Gross AR by Product Type 2017 19% 15% 9% 12% 45% Line of credit Installment and RPAs Short-term Line of credit Short-term Other installment loans Small Business Near-Prime installment loans Enova International 21
Appendix: How Enova accesses personal data End User License Agreement Example: CashNetUSA (Enova International) iphone Application You agree that Licensor may collect, and use technical data and related information, including but not limited to non-personally identifiable usage data and technical information about your device, system and application software, and peripherals, that is gathered periodically to facilitate the provision of software updates, product support and other services to you related to the Licensed Application Licensor may use this information, as long as it is in a form that does not personally identify you, to improve its products or to provide services or technologies to you 22