Current holding, started accumulating since Oct21.
Average entry price of 21.36p. Currently +77% at 37.8p mid-price early-Feb.
This had been one of my most frustrating holdings, as for a year and a half after my first purchase (Oct21), the share price went down and got stuck in the doldrums. I used the opportunity to top up a further four times. It is true what they say, the market is sometimes irrational for longer than you can have the patience for.
What is happening now, is that the numbers are finally coming in - validation of the new strategy they started a few years ago. They have been working hard and unwavering on this new strategy, and the current signs are that it is paying off in creating a growth flywheel that looks like it can self-generate sustainable revenue and profit growth infinitely (well, at least until they run out of SMEs to lend to). But is there a competitive moat around this flywheel at Time?
The stunning growth
The latest results (HY to Nov23) tell the story very simply. Back at the start of FY24 (May24), their gross lending book had grown +24% YoY, and unearned income (sum of all expected future interest income on those loans) was up +27% YoY. This has translated, for the HY period from May23 to Nov23, to revenues up +19%. With some nice operational gearing, this resulted in PBT +35%.
Note that, despite growing rapidly, there is no use of adjusted PBT, adjusted EPS, etc. The growth here is very simple, and unlike many other growth stories out there, doesn’t need adjustments to make the numbers look good. Think about all the EBITDAs, adjusted profit, before exceptionals, etc that are the mainstay of most growth company result statements.
These growth numbers above were very similar to the FY23 growth numbers, as well as specifically that of H2-23. So the growth has continued strongly, proven growth, for a couple of half years now. Validation of the strategy they started a few years ago (more on that later).
And in fact, they have started to outperform market forecasts since the start of 2023, and brokers have been playing catchup ever since, increasing their forecasts every time there is an update from Time.
What’s the new strategy?
In the past, Time was somewhat of a loan broker. It would go and find SMEs that needed to borrow money, do all the due diligence and originate the loan, but then quickly offload the liability to its partners. It would make a small fee on the loan origination, and maybe another small amount based on the performance of the loan. Direct credit exposure to the loans it originated was small.
The new strategy is simple - keep the loans on Time’s books, rather than offloading them to partners. This meant less upfront revenue, which is why success of its new strategy took so long to show up in the finances. It was the equivalent of a software company moving from an upfront license cost to a repeating SaaS revenue model.
The key, of course, is that Time is now taking on much more credit risk than previously. There are two things that make that acceptable. The first is that Time always had some skin in the game for those offloaded loans. The second was that they did maintain a small own-book lending line previously.
This risk has so far not materialised - the arrears on their own-book has stayed healthy, in fact even declined! I believe it was c9% back in 2021, and now at Nov23 it is only 6%. All the more impressive, given that we’ve heard much, over the last two years, about SMEs being squeezed by inflation, energy, low consumer confidence, etc.
Time has never gone into much detail about why their arrears are so low. So this is a big uncertainty - is it sustainable? Has it just been luck? Are they cooking the books?
Nevertheless, they seem to have created a nice little growth flywheel. They are lending more and more, the credit quality has stayed consistent despite the growth in the lending book.
Is there a secret sauce?
I’ve been trying to discern that. Is Time not just a vanilla financial lender? NTAV is approximately £36.4m, but supporting £189m of gross lending outstanding. A more conservative ratio than most high street banks are operating at, but essentially the same mechanics. Why are they able to do this, without their margins being eaten away by competition? After all, lending is a hugely competitive arena, with many players there, both legacy banks and newer “fintechs”.
I have read that Time is tapping into a “sweet spot” of SME lending. Supposedly, a space that might be too small for the big institutions to bother with. But there are plenty of smaller lenders out there too. Are they not also competing aggressively against Time in this space?
Then there is the type of lending. Time is participating in very mature markets: Asset Financing, and Invoice Financing. Surely there are many, well-funded and entrenched players in this space? Why is Time able to compete effectively, and make a good margin?
All this is on my mind. Time does not seem to have a silver bullet that explains its current success. Except maybe, it has enough of an advantage in all parts of the “flywheel”. Maybe they are good enough at origination, finding SMEs that others don’t reach. Maybe they have good enough underwriting, to serve credit-worthy SMEs that others dismiss. Maybe their debt collection processes are slightly better than others. Maybe their credit and risk control processes are good enough. Maybe they have accessed below-market-rate funding from their wholesale funding suppliers. All these combined could be creating a successful flywheel?
The future & potential
For now though, their flywheel looks pretty solid. And the great thing about a flywheel, at least in the mechanical engineering terms, is that the energy stored within will allow it to keep turning, at least for an amount of time. This momentum can be seen in their Unearned Income KPI, which will unwind over the next few years.
When I look out to the next FY to Apr25, it is easy to see a minimum of +15% revenues, +20% PBT, and therefore my conservative calculations show a 5.25p EPS is pretty much in the bag already for FY25. Similar to the 5.4p from broker forecasts. At that point, there would have been many half years of growth, proven growth. And there is no reason why Time should not trade at the top of end of the industry PE, given the growth prospects. A PE of 10x wouldn’t be unreasonable, and so therefore I fully expect the shares to be go from sub-40p to 50p+ within the next year. Fully supported by the c40p NTAV currently.
What could derail this future? Definitely a macro-economic shock, resulting in arrears jumping up. Remember - only c£36m of NTAV backing c£190m of loans. SMEs are the most vulnerable to any macro-economic shock.
There is the possibility of M&A. Time’s largest shareholder (20%) is Arena, who describe themselves as an “asset manager that provides creative solutions for those seeking capital in special situations”. Maybe they like the flywheel that Time have built, and will buy them and provide them with the funding they need to massively accelerate growth in their own-book lending. Time is currently trading at around 1x P/TB, so Arena could easily offer a 40%, 50% premium bid and still get Time for a song.