Prospa Group Limited

Prominent Small Business Lender in Australia: Prospa Group Limited (ASX: PGL) is a financial technology company, founded in 2012. The company was included in the official list of ASX on 11 June 2019 with the offer issue of 29.0 million shares at the offer price of $3.78 per share. PGL has grown rapidly over the years and has become a leader in online small business lending in Australia with a current net loan book of over $300 million. The product offerings have expanded from online business loan to line of credit facilities and B2B payments through Prospa Pay.

Business Segments and Customer-Base: The company largely focusses on small businesses and their needs for financing solutions for working capital requirements and growth initiatives. PGL caters its services to a variety of sectors with a focus on industries which are comparatively stable and have high-frequency cash flows. The services are being catered to over 19,000 customers across Australia and New Zealand.

Diversified Loan Portfolio:~98% of the revenues are contributed by Australian small business sector, with a small proportion of the portfolio from New Zealand. Industry-wise, the Australian portfolio accounts for Building and trade at 22%, followed by Hospitality at 19%, Professional services at 17%, and Retail at 16%, as at 31 March 2019.


Portfolio split by sector (Source: Company Reports)

Distribution of the Products: In Australia, the company has adopted a multi-channel distribution approach- (a) Direct, accounts for 29% of CY18 new and repeat loan volume, and includes direct customer acquisition through all digital channels (online, social and mobile) as well as more traditional forms of customer acquisition including direct mail, TV, radio, print and sponsorship. (b) Partner, accounts for 71% of CY18 new and repeat loan volume. Distribution Partners include Finance Brokers, aggregator networks, affiliates and accountants and strategic partnerships. 

Unmet Demand Leads to Potential Market Opportunity: Of the 2.3 million small businesses in Australia, only 1.7 million businesses witnessed an annual turnover of over $50,000. Of these small businesses, 1.2 million would have a risk profile and customer need that are consistent with the company’s risk criteria and product offering. With the average loan size of $29,00010, the estimated market opportunity for small business lending in Australia is, therefore, more than $20 billion.
 

Top down analysis of total potential market opportunity (Source: Company Reports)

Financials:  Net revenue for the company is expected to reach $127.6 million in FY19 on a pro forma basis. The company is likely to post losses of $1.5 million in FY19 (on pro forma basis). With this, the management expects CAGR growth in revenue for the period FY17-FY19F at 55.4% on a statutory basis.
 
 
Key Historical financial metrics(Source: Company’s Reports)
 
Top 3 Shareholders: As per the company report released on 13 June 2019, the three largest shareholders include - Curfore Pty Ltd with 32.29% stake, Greg Moshal Pty Ltd with 15.31%, followed by International Group of Companies Pty Ltd with 6.01%. 

Recent Updates: The company informed that AustralianSuper Pty Ltd has become an initial substantial holder of the company with the voting power of 5.40%.

Outlook & Stock Recommendation: At the current market price of $3.700, the market capitalization of the company stands at ~$598.61 million as of 11 July 2019. It has corrected ~16.82% since its listing. The company has posted strong growth over the years in terms of small business loan product in Australia. With the growth in core offering, the company has been able to create a scalable platform. With the vision to build cash flow products and services allowing small businesses to flourish, the company intends to use the scale and leverage its existing capabilities across funding, technology and distribution. With tapping the untapped market by banks and large institutions, the company has been able to grow its top line significantly. Scalable platform, strong track record of customer repeatability, large unserved opportunities, innovative product line, etc., augur well for the prospects of the business, going forward. Hence considering above-stated parameters and current trading level, we give a “Speculative Buy” recommendation on the stock at the current market price of $3.700, down 0.27% on 11 July 2019.

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