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#P2P lending sector overview ($LC, $ONDK, $TBDY:SS)

Europe’s leading P2P lending provider TrustBuddy (TBDY:SS) used to be the only of its kind to be listed on the stock market. This changed in late 2014, when US companies Lending Club (LC) and On Deck Capital (ONDK) made a successful debut as listed companies.

Lending Club’s IPO was met with strong investor demand which led to the IPO pricing at USD 15, above the final indicated range of USD 12 -14. Moreover, shares surged over 50% on the first day of trading on December 11th, 2014. It is widely acknowledged that Lending Club’s IPO is a bellwether of the sector’s growing importance. Industry representatives such as Sam Hodges, co-founder of P2P company Funding Circle consider the IPO a door-opener: “We anticipate seeing other major financings, strategic partnerships, likely including with some major banks, and M&A across the sector over the coming year.”

Lending Club’s IPO was followed by On Deck Capital’s IPO shortly thereafter. Unlike Lending Club and TrustBuddy, On Deck mostly holds loans on its balance sheet and therefore has credit / balance sheet risk.

Here is  a quick comparison of what the three listed alternative financing companies’ operations:

  1. Lending Club is an online alternative platform that offers creditworthy borrowers lower interest rates and investors better returns. Customers with adequate credit score can borrow up to USD 35,000 for 3-5 year loans. Investors can invest in individual loans in increments as low as USD 25. Investors ranging from individuals to institutions select different loans to invest in.The company recently launched a small business loan product as well. Lending Club does not fund the loans itself and therefore has no associated balance sheet risk. Says Lending Club’s CEO Renauld Laplanche: “We operate at 400 to 500 basis points lower than the banks and have customer satisfaction rates that are multiple times greater than the banks. ” According to data provided by Yahoo Finance, Lending Club is expected to report 2014 revenues of USD 210m and an EPS of USD 0.02.
  2. On Deck Capital underwrites and distributes loans to small businesses, assessing applicants based on cash flow, online sentiment and credit history. The company offers loans from 3 to 24 months and USD 5,000 to USD 250,000 with approvals in minutes and funding in as fast as 24 hours with loan size averaging around USD 35,000. On Deck withdraws variable small increments from customers’ bank accounts each day rather than asking for monthly payments. According to data provided by Yahoo Finance, On Deck Capital is expected to report 2014 revenues of USD 155m and an EPS of USD -0.16.
  3. Following the recent acquisitions of Geldvoorelkaar (Netherlands) and Prestiamoci (Italy), TrustBuddy is probably the most diversified P2P actor in the world. The company offers short-term and longer-term consumer loans, as well as P2P loan products for small and mid-sized companies.  Within the short-term consumer loans segment, TrustBuddy has an average loan size of EUR 350 and an average loan duration of 3.2 months. Within the longer-term consumer loans segment TrustBuddy has an average loan size of EUR 5,000 with an average loan duration of 34 months. The company’s SME business has an average loan size of EUR 65,000 with an average duration of 48 months. There is currently no analyst coverage for TrustBuddy but we know that For the first 9-months of 2014, TrustBuddy itself reported revenues of SEK 87m. In a trading update in November, the company also said that October revenues came in at SEK 10m, so we believe it is a conservative guess that FY 2014 revenues for TrustBuddy will be at least SEK 120m, which would mark an increase of 48% y-o-y.

The P2P lending sector is very hot right now and many US brokers are following Lending Club and also On Deck Capital. Here is what a few of them have to say:

  • William Blair: “…With a combined USD 2.3 trillion of student loans and automobile loans currently outstanding, entering these market segments (or others) could drive future growth, in our view.”
  • Morgan Stanley: “The marketplace lending market is still young, and we expect significant developments on the technology and regulatory front in the coming months and years, with a wide range of expected outcomes possible (for LC). Additionally, it remains unclear how incumbent financial firms will respond to the growing breed of non-bank alternative financial platforms. Some banks have decided to partner with Lending Club, some are investing in their own online platforms, and some are increasing investments in disruptive technologies.”
  • BMO: “...we believe Lending Club is just beginning to scratch the surface of a nearly USD 400bn market opportunity in the near term.”
  • BTIG:…we believe consumer preference shift is likely to occur that would akin in previous shifts such as those from transitional booksellers like Borders to Amazon…
  • Citi:We believe that the fundamental cost and convenience advantages of internet-based services versus traditional banking services should persist.”

We note that the overall market for P2P loans has enjoyed tremendous growth ever since the financial crisis:

p2plending

Obviously, the enormous potential and strong growth should logically be incorporated in the valuation of the company. Here is a comparison of the valuation of the three listed P2P companies:

  • According to data provided by Yahoo Finance, analysts expect Lending Club to report 2015 revenues of USD 375m. In combination with an enterprise value of USD 9.4bn, this implies a 2015 EV/Sales multiple of 25x.
  • For On Deck Capital, analysts expect 2015 revenues of USD 249m. In combination with an enterprise value of USD 1.45bn, this implies a 2015 EV/Sales multiple of 5.8x.
  • As mentioned above, no analyst estimates are available for TrustBuddy. However, we note that the current market cap of TrustBuddy is SEK 360m and no interesting bearing debt at the end of Q3 2014, imply a 2015 EV/Sales multiple of 2x in a conservative base case and 1.8x in a bull case (according to our back-on-the-envelope calculations).

Conclusion:

TrustBuddy looks tremendously undervalued compared to its listed peers. This is partly due to the fact that it is listed in Sweden and that no analysts are currently covering the company. It is, simply put, still under the radar of most international investors. However, TrustBuddy is actually the most diversified of the three listed companies and we believe that it is only a matter of time until this mispricing will disappear.

Nordic Investor

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