Earlypay Limited (EPY) Earnings Call Transcript & Summary

Hello. Welcome, everyone, to the half year results for Earlypay.

So our vision is to be the first choice invoice finance provider to Australian SMEs. We think we're very well placed to achieve this goal through our early payment expertise, our tech and innovation capability, which has recently been helped by the Timelio acquisition, our relative scale and our laser focus on achieving this vision, which is supported by our new [ OKR ] framework that makes sure the whole business is aligned to this vision. We're very focused on improving the product of Invoice Finance and using tech innovation to make Invoice Finance simpler and more accessible to SMEs. Integration with accounting software was Phase 1 in making invoice finance simpler. And Phase 2, we see as integrating with third-party platforms to obtain the supporting documentation for those invoices, and that's through workforce management platforms and transport platforms. By accessing the invoices and the supporting documentation, we can seamlessly provide SMEs with the funding they need, which will change Invoice Finance to be much more seamless than it has been in the past. We also have a specialized equipment finance offering that services a similar target segment of SMEs than our Invoice finance offering, which is very important for us in terms of profitability, but also, it allows us to distribute Invoice Finance through asset finance brokers. If we can execute on this vision, the rewards are massive. As you can see at the moment, we're only around 6% of the existing invoice finance market. So there's a lot of upside in us increasing market share. But if we can make invoice finance more accessible to a broader market, then there's plenty of scope for the invoice finance market to grow for the SMEs as well. So looking to our results for the half. Our average funds in use was $225 -- $255 million compared to the prior period, that's down 9%. We'll note that the funds in use growth in the half was higher than the previous half though. Invoice finance resumed growth by growing by $9 million in that period. Equipment finance grew by $12 million in the first half and trade finance fell by $13 million, but that was a conscious and deliberate action to reduce exposure to that product. Net revenue fell in dollars by 5% to $17.1 million compared to the first half of '24, which is less than the 9% fall in the average Funds in use because our net revenue margin expanded. Net interest margin was a little bit lower. It was weighed on by the corporate loan that we had. We had $10 million of relatively expensive corporate debt in place for most of the half, and that will be less of an issue in the second half as we've paid off $5 million of that corporate loan in December and the other $5 million we'll pay off in April. The cost base in dollar terms was broadly flat, which after the Timelio integration that took some work to get there. The cost-to-income ratio did increase, though, as a result of net revenue coming off. But going forward, as we grow funds in use and net revenue, we expect the cost-to-income ratio to fall. Underlying NPAT was $2.6 million, up 24% on the prior period, and we expect the second period to be stronger given the momentum in growth in funds in use and also the lower interest expense relating to the corporate loan. Earnings per share was $0.01, which was 34% higher than the PCP, 32% higher, which is a bit higher than the 24% higher NPAT, and that's because of the lower amount of shares outstanding due to the buybacks. We are constrained by retained earnings in terms of the dividend we can pay out, and that wasn't helped by a prior period adjustment relating to GST. So the Board has declared a dividend of $0.0014 per share, which pays out the full amount of retained earnings and I'll talk about the intention for dividends going forward. After we pay off the balance of the $5 million corporate loan in April, there will still be around $0.03 per share or $8 million in surplus capital remaining in the business. To dig into the results in a bit more detail, I'll just call out a few points here because I've talked to the main ones on the previous page. We're experiencing a very low number of clients in collect out and in credit risk, both for equipment as well as invoice finance. We find that particularly on invoice finance, we're much more prepared when clients go to collect out and our recovery rates are much better than before, which is a result of the hard work we've done over the last couple of years to improve our risk management. The focus on invoice finance and equipment finance is also helping us. We're aggressively reducing our exposure to trade, which is inherently a riskier product where we have less confidence in that product than in invoice and trade. So focusing on the products we're good at is leading to much lower actual credit impairments as well as expected future credit impairments. We're also helped a little by the recovery of some loans that were previously written off. And because of the strong performance of the portfolio, we hedged down the general provision a little as well. Recovery costs is worth calling out, just not having to fight with borrowers to recover our funds, like we have had to over the last couple of years, has had a material impact on those costs as well as the internal resources that it requires to work on those difficult recoveries. Our effective tax rate is 43% as a percentage of reported profit before tax. Now our statutory tax rate is 30%, but amortization relating to the Timelio acquisition, that's not tax deductible. So that's what works out to be 43%. Next please. To the segments, invoice and trade. The most pleasing part here is the expansion in NIM and net revenue margins. This is a natural effect of focusing on smaller SMEs that really value our service, and we can charge higher margins for. Now the impact of that net revenue margin is best highlighted by the average funds in use fell by 11%, but net revenue only fell by 2% in dollar terms. So the outperformance relative to the funds in use drop of net revenue is all because of the margin expansion, and we expect that to keep increasing actually as the corporate loans repaid and we continue to work through some clients that are very tight margin and replace them with smaller, higher-margin SMEs. Recruitment finance originations have been very strong since we've changed the parameters. In the first half, we originated more loans than we did in all of the previous financial year, and the momentum has been accelerated towards the end of the half. So we expect that to continue strongly into the second half. Importantly, though, with this product, it is really helping us promote invoice finance to asset finance brokers. And I think as a business, we're much better at doing that than we were before. And there's increasing overlap between clients using equipment finance and invoice finance as well. So that's really -- in its own right, it's a great segment, but it's really supporting invoice finance more online. On the balance sheet, the cash and cash equivalents is it bounces around a lot. It's a snapshot on 1 particular day, and there are a lot of invoices paid on the last day of the calendar year. More importantly is the $13.3 million in corporate cash that is available, and that's a large part of why we have so much capital in the business at the moment. And the strong operating cash flow in the half, operating cash flow contributed $4.8 million, which is very, very strong. So Earlypay really is a highly cash-generative business, and that's why we have so much confidence in the capital outlook. Strategy and growth. So the traditional channel of brokers and other referrals that continues to dominate most of our distribution, and we're investing aggressively in making invoice finance simpler to use. Historically, it's been clunky. And the technology exists now to make it a lot more seamless and more comparable offering to other fintechs that have really slick and fast funding alternatives for SMEs. So we're really working hard on that. Marketing-led sales has increased a lot, much more than ever before in terms of its contribution to sales and client and staff referrals are also an important contributor as well, which is pleasing because generally that shows that our clients are happy and our staff are happy to refer our products to other SMEs. So improving how we deliver invoice finance as a product is also critical to our success in embedded finance, which is the right-hand column, where we provide early payment of invoices in nonfinancial platforms, such as time sheet and delivery platforms. So building out the embedded finance offering is a core focus of ours, and we're making good progress, and we're starting to see more business through that channel, although it's still low compared to the traditional channel. Underpinning both of those channels is using technology to improve our version of invoice finance. So it's the first choice for SMEs and their referrals. Very focused on smaller underserved SMEs that can benefit from invoice finance the most and also help us build a diversified portfolio of higher-margin exposures. Lastly, continuing to build the Earlypay brand is important. We're less well known than other brands. And there's evidence of that starting to act as a tailwind for us in distribution. And just generally, as I said at the start, the utilization of invoice finance in Australia is very low compared to other markets. And we really believe that if we can make it a better product, then a lot more SMEs in Australia will use. The portfolio positioning. We've really been aggressive, I would say, in tightening up the portfolio to reduce our exposure to trade finance. So in December 2023, we had funds in use in trade of $29 million, and that has fallen to $10 million in December 2024. By the way, that donut chart on the left, the numbers are a little bit off. It adds up to more than 100%. The trade finance as a proportion of the portfolio in debt '23 was 10.5%, and that's fallen down to 3.2% as of December '24. In terms of our concentrated exposures, we did have some very big concentrations to single borrowers before, which we're working through and very close to balancing it to where we want to be. The largest [ tenant ] exposures in 2023, December represented 22%, and that's now down to 15%, and that will continue to fall in the second half of this financial year. Funding, we really are approaching the end state here. You can see at the bottom there that there's the $5 million of corporate loan outstanding, which we'll pay off in April. And after that, the invoice finance new warehouse, it's operationally really easy to use. It's capital efficient with our equity contribution and the pricing is good. So we really just have to grow into that now and make the most of the headroom that we have. Equipment finance, it's an older warehouse. It is fine now that we adjusted those parameters around this time last year, and it's letting us originate the loans to our target segment really well and supporting the growth that we have. In time, we might look to update that warehouse and get some improved pricing and release some equity from it. But for now, that's definitely not on the agenda in the short term. And just one thing on the headroom, there's lots of headroom in both facilities for both products, so we can grow, let's say, very strongly without capping out on that. But the undrawn amounts, they do come with an undrawn facility fee. So we want to consume that capacity so we can put the money to work instead of paying the standby fee, which will support our NIM and net revenue going forward. Capital management and outlook. So over the past year or so, there has been more than $25 million of capital released. A lot of it has come through the refinancing of the invoice finance and trade warehouse, but also more efficient use of the balance sheet. For example, there were some loans on the balance sheet that didn't fit into a warehouse that have now been repaid that have freed up a lot of capital. You can see in the table on the right there that we've used this to pay for the cash component of Timelio. There was a $19 million corporate bond that we repaid and replaced it with a $10 million corporate loan. We've already paid off $5 million of that corporate loan and the balance will be paid off in the next few weeks. And we also bought $4.5 million of shares as part of the on-market share buyback. So all of those capital management initiatives have been EPS accretive, and we've deployed a decent amount. Having said that, we do still have that $8 million of additional surplus capital available after we pay off the other $5 million of the corporate loan. And this could be used for bolt-on acquisitions, although it's increasingly difficult to buy other businesses in invoice finance that will be EPS accretive to us. And the on-market buyback is also [ on foot ], where we can buy the 27 million shares, although our stock is a liquid and it's unclear how many we could buy. We will do our best. And the Board is also considering other means to return capital to shareholders, which could be a pro rata capital return, which we are beginning to explore, not very well advanced. To do this, we need to get a class ruling from the ATO to -- for them to say that it's capital and not income and there's a few hoops to jump through. So it's not well advanced, but it's certainly an option. In terms of the dividends, the dividend -- interim dividend was small, but we wanted to pay out as much as we can to shareholders. At the end of the financial year, we intend to also pay out 100% of the accumulated retained earnings. And then after that, depending on how the other capital management initiatives go, we'll keep paying out the full amount of retained earnings as fully franked dividends to shareholders. In terms of the outlook, the momentum that we've seen in the first half is expected to continue and increase in the second half, and that will support funding use and EPS growth. The earnings per share guidance of $0.022 per share, we're reaffirming, and that's going to be supported not only by the funds in use growth, but also the lower interest expense in the back half. The update on strategic initiatives. As a follow-up to the last ASX release and the article in the paper, we are exploring strategic initiatives and are in discussions with several parties. These discussions are at a very early stage, and there's no guarantee a transaction will take place. And the ASX continuous disclosure obligations, we will abide by and keep the market updated if anything material happens. I welcome any questions.

Grace, do we have any questions?

[Operator Instructions] Okay. So a question has come through. What's driving the compression of management admin revenues and interest income compared to volumes of invoice finance underwritten? Sorry if I missed that in your commentary.

I believe that if he is talking about the in-dollar terms, I believe that relates to just lower funds in use. You can see that the margin -- the noninterest income margin actually increased, but the dollar amount of those fees fell because the base of funds in use was lower.

That's it for the questions submitted so far. Here comes another one. You mentioned the stock is illiquid. However, there does appear to be supply above $0.22 on the market -- on market. Is there a cap on the price Earlypay are willing to pay on the buyback?

Yes. We just -- it's discretionary, and we just do what we think is the most accretive behavior for our shareholders.

Do the M&A discussions preclude you from buying back stock? Or are they still at a preliminary stage?

The discussions are at preliminary stages, but it does make it awkward to be in the market. And our Board is very conservative. So if there's ever a gray area, then we won't be in the market.

Thank you. Next one, any view on FY '26 outlook maybe based on exit run rate at the end of FY '25?

I can say that we expect '26 to be quite a bit stronger than '25 given the momentum we expect in the second half, and we're seeing already in the first half.

Great. Next one. Can you talk about the lower credit provisioning in equipment finance that seems to counter to some of your peers that have reported.

Yes. I think that's true. The performance of the book is very strong. I think the fact that we were not lending aggressively in the mid-stage of the cycle undoubtedly helped. And as James alluded to before, we weren't lending aggressively there because we had some portfolio parameter constraints on the funding. There was an uptick in arrears in late '23. But it seems that the book has performed exceedingly well. And as we start to grow in the last 6 months that the book is becoming more and more diversified, we're very, very confident with both the existing book, the back book and the assets that we're writing now. So there was a minor change to provision across -- a general provision across both IF and TF, but at 1% general provision broadly, we're comfortable that the book is exceedingly well provisioned on IF and TF and appropriately provisioned for EF.

Thank you. Next one, what is the nature of the clients coming through the new channels compared to the traditional channels? Are they smaller clients from certain industry, credit quality, et cetera? Any detail you can provide would be appreciated.

I would say in terms of size, they are pretty much the same as what we see through the -- sorry, the traditional channels. The industries are related to the platform. So it's a workforce management platform and it's going to be labor hire and recruitment typically and transport businesses through the other platforms. The credit quality probably is a little bit better, I would say, than the other opportunities that we see just because if we're making it easy, then it's more of an acceptable way to access early payment of invoices through those platforms.

Next question, new channel strategy. Is there any risk of traditional channels responding negatively as they get terminated as we wait to get traction in new channel?

There are 2 parts to the work we're doing with this embedded finance. The first part is making invoice finance better. Now that is from accessing invoices to the accounting software, accessing the supporting documentation through integration with the platforms. And the benefit of that accrues to both traditional channels and also to the new channels. So brokers and other referrers get the benefit of that. In terms of embedding our early payment offering into nonfinancial platforms, it's still very small and young, and there's no hint that it's going to cannibalize the traditional channel at this point.

Next question. In assessing any potential corporate transaction, do you take into account the significant net asset position any acquirer would get their hands on to assess if the price they are prepared to pay is fair and reasonable?

Yes. I think that's an important part of understanding Earlypay's value, not only the future earnings of the business will generate, but we have surplus capital at the moment and one would expect that, that would be reflected in the value of the business.

That's it for questions. Back to you.

Okay. Thank you very much, everyone. We appreciate your support.