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12 March 2020

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Funding Circle – FY Results

Share Price 61p

Mkt cap £191m

Conflict Disclosure: No Holding

  • Results. Loans under management grew 19%. Revenue was up 18% to £167m and adjusted EBITDA loss was £27.5m.  Loss before tax was £49.9m, in line with the cash outflow, but including exceptional the reported loss was £84.7m. Segment adjusted EBITDA is a meaningless figure as it strips out broker origination costs. With slowing growth the company is now expecting to halve EBITDA losses and trading is said to have started the year well. Cash is down from £333m to £165m
  • Estimates The company is forecast to be loss making over the forecast horizon.
  • Valuation NAV is £319m.
  • Conclusion Bear markets arrive periodically to cleanse poor capital allocation. It is hard to see this stock surviving.

21 October 2019

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Funding Circle – Q3 Update  

Share Price 103p

Mkt cap £358m

Conflict Disclosure: No Holding

  • Update Loans under management up 31% to £3.7bn. Originations up 9% to £1.8bn.  Gross yields for the 2019 vintage continue to show increases across all geographies varying from 9.9% in the UK to 12.9% in the US.  Projected returns are increasing in the UK but not in the US, implying fees of bad debts are also increasing in the US. In the IS impairments are expected to be 6.1% – 7.3%. Guidance is unchanged and the outlook says they continue to manage the business prudently.
  • Estimates Losses are expected across the 3 year forecast horizon. Perhaps the revenue forecast for the current year of £170m is in line. This year’s loss is expected to be £50m
  • Valuation 2X revenue could be cheap if the company was set to make high operating margins.  Saga has started to offer 3 year deals for insurance because it saves on the brokerage costs which indicates the stage of the cycle we are at where brokers rather than underwriters have the upper hand. Funding Circle don’t disclose their brokerage costs, and separate to the rest of the lending industry include them in marketing costs which encourages observers to split them out in their calculation of terminal value.
  • Conclusion The £270m of gross cash is now accompanies by £147m debt which finances the loans on the balance sheet. With a queue of retail vendors of loans I can’t see a good outcome here.

14 October 2019

Funding Circle – Liquidity  

Share Price 98p

Mkt Cap £341m

Conflict Disclosure: No Holding

  • News It appears that Funding Circle has a liquidity problem. The information can be found on the FAQ section of their website. In September it took an average of 100 days to sell a loan and this increased to 124 days between 2 October and 8 October. Funding Circle also says “if you are joining the queue now it is likely your sale time will take longer”.  
  • Estimates Having achieved a £31m loss in H1 (£27m loss in H1 2018) from revenue of £81m the company looks on track to achieve the estimated ££171m revenues and £50m loss for the year. In H1 originations were up 14% and loans under management were up 37% to £3.5bn. With a queue of people trying to sell loans perhaps we should take the loans under management number as unrepresentative of the future.
  • Valuation 2X revenue is still a full valuation. The company has £270m cash but on top of that it has £33m of investments in its own loans and £147m bank debt on a revolving credit facility.
  • Conclusion This looks catastrophic for the model. The outlook at H1 results in August guided to 20% revenue growth. But when you are holding back the sellers it is possible to manufacture growth. In H1 £35m marketing spend drove an increase in originations of £149m of loans.  That looks like a model that doesn’t work.

1 July 2019

Funding Circle Holdings – H1 Update

Share Price 163p

Mkt Cap £567m

Conflict disclosure: No holding

  • Update Loans under management up 37% and new loan origination up 14%. Revenue growth 30% and “segment adjusted EBITDA” breakeven.  Investor returns are expected to be 5%- 8.5% in 2019 and revenue growth expectations are being reduced for 2019 from 40% to 20%.
  • Estimates The company remains loss making within the forecast horizon. 2019 revenue expectations likely to reduce from £200m to £170m. The £35m loss expectation may increase with lower growth but the company says it expects to improve on last years loss which was £49m,
  • Valuation 3.3X turnover. But the company still has significant cash from its IPO. At December 18 it had £330m so the EV may be c£250m valuing the company at 1.5X revenue
  • Conclusion  The company has found that the age old rule of SME lending holds true whereby fast growth increases impairments. I suspect this isn’t the last downgrade.  Having IPO’d at 440p and now at 163p I can still see the shares halving before they trade close to cash.

4 June 2019

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Funding Circle Holdings – Lendinvest results 

Share Price 246p

Mkt Cap £857m

Conflict disclosure : No position

  • Lendinvest Results There aren’t any quoted results this morning but the private P2P mortgage lender Lendinvest has announced it results. It reports revenues of £72.7m from platform assets of £788m. Profit from operations was £3.3m.  The P2P mortgage lender reports good take up of its buy to let product and intends to launch a first homeowner product during 2019.
  • Funding Circle reported roughly double this turnover for the year to Dec 2018 at £141m from 4X the amount of platform assets of £3.15bn.  It also reporteda £50m loss for the year but managed a “segment adjusted EBITDA” of £7m
  • Valuation Market cap is 4.3X 2019 turnover but with significant cash balance the EV/turnover is 2.6X
  • Conclusion Lendinvest appears from these numbers to operate a more profitable model than Funding Circle. Recent impairments and the winding up of the listed fund have caused the share price to fall from the 440p IPO price to 246p today. At 2.6X turnover the shares may be discounting a 25% operating margin. From today’s turnover.  That is outside the forecast horizon.  Somewhat forward looking.

13 May 2019

Funding Circle

Share Price 245p

Mkt Cap £851m

Disclosure: No holding

  • News The Sunday times ran an article about Lendy, the P2P lender , delaying payments to customers due to Barclays IT failure.  The research company 4thWay was quoted which provides analysis of P2P lenders. A read of their reviews says they are unable to provide a rating for Funding Circle. The reason “We used to praise Funding Circle for its openness in sharing details about its business, which used to include “sharing the fine detailed history of each loan over time”, which allowed us to assess its performance using both bank risk modelling and investing techniques. However, Funding Circle withdrew this information in spring 2018, which leaves a big question mark over its future. “
  • Valuation Having IPO’d at 440p last October the shares trade at 245p which represents 4.3X Dec 19 revenue expectation
  • Conclusion If we stripped out marketing costs from last year’s £50m loss Funding Circle would be close to break even.  The lack of disclosure makes any serious analysis impossible.  And the risk of shorting this is that when the company stops its marketing spend it will suddenly produce profits.

26 April 2019

Funding Circle  – Returns Revised 

Share Price 242p

Mkt Cap £840m

Disclosure: No Holding

  • Update The shares were down 13% yesterday while press commentary said they were revising down their projected returns for investors.  Projected retrurns on the balanced portfolio are reduced for investors from 6-7% to 5.5% to 6.5%, a 50 bps reduction.
  • Estimates With Funding Circle charging fees on originations and management this doesn’t affect their own revenues but it’s a bit like an underperforming fund. It has the ability to significantly affect their ability to grow which matters a lot when you make a £50m loss.  With £300m on the balance sheet they can take longer than the predicted 3 years to reach profitability but the share price reaction evidences investor nervousness.
  • Valuation With the shares down 45% from the IPO price they now trade at a market cap/revenue of 4.2X
  • Conclusion I had thought in the current bubble it was too early to sell this. The reduced expectation of investor returns is on the back of a harsher economic environment.  If impairments increase further the model could be under threat. In my note of 22 March I estimates Funding Circle may need around double the current revenue run rate to reach break even. Originations were up 23% in Q1 year on year. It will need a faster growth rate than that to reach break even in 3 years and with returns being revised downwards it looks unlikely. It could go down a lot more.

7 March 2019

Funding Circle Holding Plc – Inaugural FY Results

Share Price 351p

Mkt Cap £1.21bn

  • Results The headlines read well with 55% revenue growth to £141m exceeding IPo guidance of 50%. Segment adjusted EBITDA of £7m is shown and a loss before tax of £50.7m while cash is £333m after the £300m of IPO proceeds. The outlook is strong with expectation of £200m of revenue in 2019. Marketing costs have been maintained at 41% of revenue.
  • Detail  The segment adjusted EBITDA is before £11m of central costs (up from £7.6m) because of the costs of being listed.  It is also before £24.5m of IT platform costs and £8.6m of share based payments.  And a further £11m of IT costs have been capitalised into intangible assets.  The loan loss provision stood at £2.5m which is 0.07% of the £3.15bn loan book
  • Valuation  6X 2019 revenue. The high margin (37%) lender Amigo Holdings trades at 5X revenue by way of comparison.
  • Conclusion  There is room to be sceptical about their creativity used in presenting numbers. The model of spending 41% of revenue in customer acquisition costs on the face of it seems doubtful although no where can I see the duration of the loan book. As this is SME lending it is likely to be relatively short duration which calls into question the wisdom of spending so much on marketing.  And the IT costs are also large while the loan loss provision looks low.  Well done funding circle management but it is beyond me.