Regional Management: Strong Margins And Stable Loan Book (NYSE:RM)

Low angle view of architectural columns

arsenisspyros/iStock via Getty Images

Thesis

Regional Management Corp. (NYSE:RM) displays continued growth, sustained EBITDA, and a robust loan portfolio with a stable delinquency rate. The share price has dropped, following the overall market, but expect it to rebound and continue along its previous trajectory.

Intro

RM is a diversified consumer finance company, currently operating with 350 branches across 13 states serving over 450,000 customers. The company provides loans to consumers that tend to have limited access to consumer credit from the more traditional lenders, such as banks and credit card companies, and therefore RM is a sub-prime consumer finance provider. The loans on offer are typically small and large instalment loans. The company currently operates 350 branches across 14 states.

Unfortunately, RM’s share price has recently taken a beating, dropping by almost 50% of the past year, slightly more than the overall market. The share price currently sits at around $30. Prior to this decline, the share price was outperforming the overall market.

Stock Price

Google

Financial Analysis

Overall, RM has been performing well, with revenue growing at a 3-year CAGR of over 9%, reaching almost $400 million in 2021, primarily driven by interest and fee income, with only a small portion of the revenue generated from insurance income.

Chart, bar chart Description automatically generated

SEC

(Source: SEC)

Revenue growth in the past year alone was 14% due to an expansion of the loan book.

Chart, waterfall chart Description automatically generated

SEC

The core loan book grew 26.5% over the past year, driven by a 10.4% increase in small loans and a 35.5% increase in large loans.

Small loans are loans ranging from $500-$2500, with terms of up to 48 months, and typically secured against non-essential household goods. Large loans on the other hand are loans ranging from $2,501-$25,000 with terms between 18 and 60 months. Again, these tend to be secured loans. The company also offer retail loans, but these are a fraction of the entire loan book. Small and large loans are core to the business.

The company has successfully reduced operating costs as they have managed to expand its loan book while at the same time decreasing the number of branches the company operates. RM reduced the number of branches from 365 in 2020 to 350 in 2021, implying that loans per branch increased by almost a third over the year.

Chart, bar chart Description automatically generated

SEC

These cost improvements have been reflected in the gradual improvement in EBITDA Margin. Overall, most costs have improved as a % of sales. For example, provisions dropped from 31% of sales to 23%, and occupancy dropped from 7% down to 6.3%. The decrease in provisions was due to a decrease in the allowance for credit losses of $18.4 million primarily due to the release of COVID-19 reserves in 2021 and a decrease in net credit losses of $16.4 million compared to the prior-year period. However, unfortunately, other costs rose slightly (but these rises were offset by other cost improvements). Personnel costs increased slightly from 29.3% to 31.3% over the past 3 years.

Chart, bar chart Description automatically generated

SEC

These cost improvements have led to an increase in EBITDA margin from 23.5% in 2019 to 28.7% in 2021 (with a slight drop in 2020 due to covid provisions).

Chart, bar chart Description automatically generated

SEC

RM has successfully maintained the high EBITDA margin, as the latest quarterly report indicates that H1-22 EBITDA came in at almost 27% (although this is far below the 40% EBITDA margin achieved in the first half of 2021, but I imagine this is a covid lap that is now being normalized).

In addition to improving the EBITDA margin, delinquency rates appear to be somewhat stable (although a slight increase from the year before, but this was expected). The overall delinquency rate remains at 6% of the total loan book value, which is a reasonable figure and is largely driven by 30-59 days.

Chart, bar chart Description automatically generated

SEC

Valuation

Overall, we can see that RM is making gradual improvements, and continues to have robust revenue growth, strong EBITDA margins, and loan book and delinquency rate.

In terms of valuation, RM’s EV/EBITDA currently sits between 8x and 9x, which is in line with peers (ENVA and FCFS for example), indicating that RM is not currently undervalued. However, given that the overall market has experienced a recent sell-off, and RM continue to improve its top and bottom line, we can expect RM to rebound and continue along its previous trajectory.

Chart, bar chart Description automatically generated

Yahoo Finance

Risks

  • One risk is that inflationary pressures and continued increases in interest rates could see a sudden uptick in the delinquency rate as consumers begin to have cash flow struggles. RM is seen as a sub-prime lender with a small loan portfolio and presence, so a sudden uptick in delinquencies due to the current economic climate could lead to drastic results in the company and downward pressure on margins. On the other hand, EBITDA margins are very strong right now, well above 20%, so even if the delinquency rate were to rise slightly, RM would still have strong positive cash flow despite the margin squeeze.
  • Secondly, if the stock market were to continue falling and enter a deep bear market, we could potentially see RM follow the overall market and the share price continue declining. On the other hand, a bull market generally always follows a bear market, so this risk is probably short-term.

Conclusion

As discussed, RM has robust sales growth and strong EBITDA margins. Their loan book is expanding at a good pace and their delinquency rates are low and stable. The stock is not currently undervalued compared to peers, but the share price has dropped with the market and the company continues to make gradual improvements. We recommend holding the stock, as we can see a rebound in the near future, but not necessarily an outperformance given that they are already valued at a fair price.

Be the first to comment

Leave a Reply

Your email address will not be published.


*