Springleaf Holdings (LEAF) made its public debut on Wednesday, October 16th. Shares of the leading consumer finance company ended their first day with gains of 13.3% at $19.26 per share.
I remain on the sidelines. I have no taste to pay a premium valuation multiple for a finance company offering consumer loans to the non-prime segment. I see few reasons for profits to improve to a level which makes the current valuation appealing, while Springleaf remains dangerously exposed to a severe renewed downturn.
The Public Offering
Springleaf is a consumer finance company which provides responsible loan products through consumers, though a nationwide network and its internet iLoan division.
The company has a near 100-year track record of underwriting high quality loans, and servicing personal loans to non-prime consumers in particular.
The company has 834 branch offices with well-trained personnel. Crucial in Springleaf's operations is the effective underwriting at high quality standards, partially the result of the personal relationships with customers. The company furthermore is growing operations through acquisitions, being serviced through its central operations. Recently Springleaf acquired through a joint venture a $3.9 billion consumer loan portfolio from HSBC, called the "SpringCastle Portfolio."
Springleaf sold 21.0 million shares for $17 apiece, thereby raising $357 million in gross proceeds. Some 11.5 million shares were sold by the company which thereby raised $195 million. The remaining 9.5 million shares were being offered by selling shareholders.
Initially, bankers and the firm set an initial price range of $15-$17 per share. Shares were eventually sold at the high end of the initial public price range. Note that Springleaf upped the offer size by a million compared to an originally planned 20 million offering size.
Some 19% of the total shares were offered in the public offering. At Friday's closing price of $20.20 per share, the firm is valued at $2.26 billion.
Springleaf operates in the consumer finance industry, essentially serving the large and growing population of non-prime consumers who lack access to credit from banks, credit cards and other lenders.
As of June 2013, the US consumer finance industry has some $2.9 trillion in outstanding borrowings according to Experian Plc, found in Springleaf's S1-filing. Some 51 million adults live in under-banked households, a number which has been growing through the difficult economic times in recent years.
For the year of 2012, Springleaf generated interest income of $1.71 billion, down 9.5% on the year before. Net interest income rose by 3.3% to $637.9 million. The company reported a net loss of $218.6 million for 2012, down from $224.2 million the year before.
For the first six months of 2013, Springleaf generated interest income of $993.6 million, up 15.0% on the year before. The company reported net earnings of $44.9 million compared to a loss of $93.0 million a year earlier. Extrapolating these results into the remainder of the year translates into a revenue target of $2 billion and earnings just shy of a $100 million.
The company currently holds $16.0 billion in assets, of which $14.0 billion are in receivables. Springleaf operates with $1.24 billion in shareholder equity, while total equity stands at $1.72 billion when factoring in the $485 million capital contribution from non-controlling interests.
Springleaf plans to use the $195 million in gross proceeds to repay or repurchase outstanding indebtedness and support further growth. Specifically, Springleaf might repay the 6.9% medium term Senior J notes, due in 2017.
The equity in the business is valued at $2.26 billion. This values operating assets of the firm at 1.1 times annual revenues and 23 times earnings.
As noted above, the offering of Springleaf has been a success. The company priced the offering at $17 per share, some 6.2% above the midpoint of the original preliminary offering range.
Shares have seen even more upside ever since, rising to $20.20 per share, some 26.2% above the midpoint of the preliminary offering range.
To truly understand Springleaf's perspective it is important to look at the history of the business. An 80% stake in Springleaf was sold by financially distressed American International Group (AIG) back in 2010 for just $125 million to buyout group Fortress Group. The company reported large losses in recent years, but restructured last year by closing 231 branches, which involved the layoff of 820 employees. The company furthermore ceased the troubled real estate lending practices.
Fortress will continue to hold a large stake, some 78% of the business will be held by the buyout firm following the public offering. Besides risks being associated with concentrated ownership, Springleaf is subject to normal risks including the economic sentiment, the lack of planned dividends, regulatory developments with regards to interest rate caps, at specific risks associated with the origination of loans through the internet.
Actually, Springleaf should be able to meet the full year expectations as outlined above, rather easily as Springleaf only closed the $3.9 billion loan portfolio deal "SpringCastle" in April of this year. That being said, Springleaf trades at high multiples in an economy which is showing reasonable growth at the moment.
Given the troubled performance in the past I remain on the sidelines. The valuation is already quite high, especially on earnings multiples despite a reasonably solid economy at this moment. I see few reasons which could result in sustainable earnings growth going forward, while lending businesses like Springleaf remain dangerously exposed to severe downturns, like the one in 2009.
I remain on the sidelines.