Description

Company Description 

Elevate Credit (“ELVT”) is an online sub-prime credit solution provider with a “Good Today, Better Tomorrow” mission to provide lower priced, safe, convenient and flexible solutions to non-prime Americans. ELVT is focused on passing value to the customer and reduce its APRs as it targets EBITDA margin in the 15-20% range.

ELVT offers 3 main products: RISE installment loan, ELASTIC line of credit and TODAY credit card.

• RISE is an installment loan with rates ranging from 36% to 299%. There are no origination fees, monthly fees, late fees, over-limit fees, or fees for returned payments on the product. Eligible customers may receive a rate reduction on their next loan if certain eligibility criteria are met. RISE effective APR of 110% for the year ended December 31, 2020, is nearly 75% lower than the average effective rate of a typical payday loan (~400%)

• ELASTIC is an online line of credit originated by a third-party lender, Republic Bank. ELASTIC effective APR for the year ended December 31, 2020 is 94%. Consumers must make a 10% mandatory principal reduction each month designed to encourage the full repayment of the original loan amount in approximately 10 months or less. 

• TODAY Card is a credit card product designed to meet the spending needs of non-prime consumers by offering a prime customer experience. TODAY Card is originated by Capital Community Bank of Utah under the licensed Mastercard brand. Today is Elevate’s lowest APR product (29.99-34.99%) targeted to serve a broader spectrum of non-prime Americans. 

For an additional description of the company and its background please refer to the excellent writeup by Madler934

Opportunity

ELVT stock price has suffered significantly from the COVID headwinds the company faced during COVID related to its Loans Receivables trajectory. While reaching a level of $600mm+ in 2017-2019, receivables were reduced drastically in 2020 as non-prime customers benefited from the Government subsidies and had a significantly reduced need for short term financial help.

Recently, with the expiration of subsidies, receivables have been growing rapidly, reaching $513mm in Q3 2021. The rapid growth is impacting short term profitability as ELVT accounts for all marketing acquisition costs and bad debt provisioning at the time of the booking of the loan.

As receivables recover to pre-COVID levels, ELVT should benefit from a return to solid profitability and cash flow generation.  In addition, ELVT has potential for significant value generation if growth can accelerate, enabling operational leverage.

Based on company guidance of the per unit economics of 40% gross margin, 96% APR, 90% leverage and 9% cost of debt, a base case scenario of $50mm loan growth per year would lead to significant value

Base Case Scenario - $50mm loan growth per year

In a worst-case scenario, there is an expectation that management would be able to reduce fixed expenses, as they did in 2020 and there is principal protection as ELVT is trading at 0.7x Book Value.

In addition to the operating growth trajectory, ELVT is taking advantage of its undervalued stock price and is utilizing its cash flow generation to fund a sizable share buyback program, with an authorization that has been just increased to $80mm total and $35mm per year. As of Q3 2021 ELVT has repurchased 31% of its common share outstanding since August 2019.

Summary

ELVT appears as an asymmetric investment opportunity with very high upside if the loan growth model can accelerate, while having a capped downside. The Board and management appear to have aligned interest with significant equity ownership and are demonstrating sound capital allocation, maintaining underwriting rigor and focusing on share buybacks when loan opportunities are not appealing.

Risks

• Inability to maintain loan growth above pre-COVID levels

• Regulatory pressures at State and Federal level

• Unexpected economic distress leading to increase in Net Charge Offs

Catalyst

Catalyst

• Continued Loan growth and return to profitability

• Mitigated regulatory environment ri