Propel Holdings Shares: Impressive Financials Back Continued Price Growth (TSX:PRL:CA)

There’s no stopping Canadian AI-powered lending services provider Propel Holdings (TSX:PRL:CA)(OTCPK:PRLPF) stock. Since I wrote about it in March, it has risen 73%, leading to a doubling in price year-to-date (“YTD”) (see chart below). That’s after it was already up 125% in the year to March when I last checked.

There were good reasons for further upside even then, considering the company’s healthy fundamentals, positive outlook and attractive market multiples, resulting in a Buy rating for it.

The question now is, after the stinging price rally of the past few months, can the stock continue its upward trajectory? To assess this, here I look at the recently published second quarter (Q2 2024) and first half (H1 2024) results. This is followed by a discussion of market multiples, including the PEG ratio, which takes into account the company’s rapid growth. Finally, emerging risks are assessed.

Revenue may exceed targets

In terms of the company’s financial performance, everything looks very good. First, consider income. They grew by 48% year-on-year (“YoY”) in the first half of 2024 (H1 2024), supported by strong customer demand and an increase in loan originations. It also helped that a higher percentage of loans came from high-yield segments.

This revenue growth figure for H1 2024 is higher than the company’s target range of 30-42% for the full year 2024. This may, of course, imply that revenue growth may slow in H2 2024. However, given that a larger proportion of the company’s revenue over the past two years was generated in the second half of 2024 does not seem likely.

Consider this. In the last two years, S1’s contribution was around 44%, with the remaining 56% being generated in S2. Assuming the same will be the case in 2024, full-year revenue comes to $459 million. This implies a 47% increase in annual revenue in the last six months of 2024.

Basically, it’s likely that Propel Holdings is on track to beat its revenue targets. My estimates put the number at $459 million, compared to the target range of $410-450 million. But even if it doesn’t happen yet, it looks like the number could be at the high end of the guidance range.

Margin expansion observed

The company’s profit performance is also positive, resulting in healthy margins. The details are as follows:

• Adjusted EBITDA margin was 29% for H1 2024, an improvement from 26% in H1 2023. It also compares well to targets, being at the top of the 24-29% target range.
• The net income margin of 11.9% was also an improvement from 9.6% in H1 2023. It also came in at the top end of the target range of 9.5-12.5%.
• Adjusted net income margin of 15% (H1 2023: 12%) was the highlight of the three, as it slightly exceeded the target range of 11.75-14.75%.

Stock values

Based on performance to date, we have assumed here that the company’s full-year net income margins will fall into the upper end of our target ranges. This is an update to estimates from last time, when we assumed they would fall in the middle of their target ranges.

These, along with the revenue estimate discussed earlier, indicate a forward GAAP price-to-earnings (P/E) ratio of 11.96x and a forward non-GAAP P/E of 10.13x. These figures are only slightly higher than March’s 11.3x and 9.4x figures.

Note that in our calculations we also factored in a lower earnings figure in the middle of the guidance range if growth slows in H2 2024, but that didn’t make a material enough comparative difference to the P/E ratios .

Peer comparison

Non-GAAP forward P/E is between peers Green Dot Corporation (GDOT) at 7.3x and LendingTree (TREE) at 19.58x. This doesn’t give a clear picture of where Propel’s rating should really be. Especially if you ignore the fact that it’s a growth stock compared to GDOT and TREE, which have seen lower revenue growth and contracted revenue respectively over the past five years on average.

The PEG report

Instead, it’s a good idea to consider the forward PEG ratio, which takes into account the stock’s rapid growth potential. At 0.13x for 2024, it indicates undervaluation and is much better placed than the median of 1.22x for the financial sector, which denotes continued growth in stocks.

The risk factor

However, there is a growing risk factor in this otherwise positive report. And this is the growing proportion of non-performing loans. Last time, I had already pointed this out as the NPL ratio increased to 18% in 2023 from 10.3% in 2022. For H1 2024, it increased further to 18.8%.

As we move into a lower interest rate environment, this risk may decrease further. It is further tempered by the fact that the more challenging NPL segment saw the ratio decline to 3.5% in H1 2024 from 4.8% in full year 2023. Also interestingly, loan loss provisions as a proportion. revenues fell to 47%, compared to 49% in H1 2023.

What’s next?

The Propel Holdings story continues to look good. Its recent financial performance gives reason to believe revenue growth could exceed targets and profit margins will be at the high end of target ranges.

Notably, despite a large price increase in recent months, the stock’s forward P/E ratios do not show a significant increase as earnings estimates have been updated to reflect the latest performance. The stock also appears undervalued relative to its growth potential as measured by the PEG ratio. Some undervaluation could still be justified if the risks were high enough. But so far, the big risk of bad loans is limited. I’m holding a buy on Propel Holdings.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.