I analyzed EZCorp in May last year (2021). Here is that analysis. I sold out for a hefty profit, but I think it’s time to get back in a bit so I am going to add a little bit here:
The executive summary:
Trailing [EV/EBITDA = 6.6 (During COVID)] Forward EV/EBITDA ~ 4-5.
Net Book = $308M (Cash ~$233M)
Market Cap = $356M
Debt = 311M (with 2.875%, 2.375% interest)
First Quarter 2022 EBITDA = $31M (~10% market cap - thanks to decreasing stimulus checks coupled with growing store count).
They own 37% of Cash Converters international, 37% = market value of ~$43M USD.
EZCorp is a Pawn business that was hit hard, not by the pandemic, but by stimulus checks. Stimulus checks allowed people to pay off their short-term loans (which EZCorp provides in exchange for collateral). EZCorp makes most of its money from the loans- not the selling of second-hand goods.
PSC, below, stands for Pawn Service Charges. in 2019 most of the gross profit was generated from this avenue.
It has recently staged a bit of a comeback.
Q1 2022 (December- Funny financial Y/E) Results
EZCorp posted great results, proving they are recovering nicely from the pandemic, and that customers are once again resorting to Pawn- loans.
Risks
As the business gets back on track, it was disconcerting to see that the amount of weighted average diluted shares increased by about 46% from the previous quarter. The dilution comes from the 2024 and 2025 convertible notes, which stand at around $311 Million in total.
It gets quite interesting in the Q4 2021 earnings call as an analyst probes management about why they are not buying back shares (although he asks indirectly) when the company is trading at a multiple of 4-5 to EBITDA. He corners them by basically saying “you are acquiring other companies at multiples of 6-7 but you won’t buy back your own shares”
In my previous analysis of EZCorp I wondered why management didn’t buy back shares, and instead acquired other companies. I think I understand the reason now:
The $311M convertible notes are potentially extremely dilutive if the shares breach >$10 per share, and “The Indenture” is full of stipulations that benefit the noteholders, they can convert their principle into shares even in the event that management tries to settle the debt (I think this is what the analyst was missing in his questions). I am not 100% certain, but I believe this is why management is instead going down the path of acquiring other companies…building the business instead of purchasing their own shares. If they purchase their own shares, and the share price starts to breach >$10 (or 130% of $7.7 (price when notes were taken out)) it could dilute the company by 46% or more if the noteholders were to exercise.
More evidence that this is, in fact, the reason that they won’t buy back shares yet is that management has just acquired more of “Cash Converters International”- a similar listed business in Australia that trades at very low multiples, and one that they had previous ownership of, bringing their ownership of the company to 37%, or around $43M USD’s worth.
They also invested another $15M into more pawn shops in the Caribbean region instead of repurchasing their own shares.
I believe EZCorp will trade in a range between $5- $12, due to growing revenue from an increased store count, and recovery in their PLO asset.