“Traders may be intrigued by the fact that DealNet is a unique player within the lending market with an incredible amount of upside potential.”
DealNet will initially focus on a unique approach to the large and established “HVAC” finance sector. “This established market is the initial entry point for our consumer finance plans” says Small.
The target market is the seriously underserved small business Heating, Ventilation and Air Conditioning (“HVAC”) dealers who sell furnaces and air conditioning systems to consumers by providing the dealers with various financing alternatives for their customers. DealNet also provides its dealers with back office support, including call answering and scheduling services, through its existing Business Process Outsourcing (“BPO”) platforms, the Company’s other already established core business. Combined, these financing tools and the provision of back office support services result in a highly profitable and scalable solution for independent HVAC dealers, allowing them to stay focused on servicing their customers. DealNet’s complete solution dramatically improves sales for the dealers while allowing them to retain their customers’ servicing needs and alleviating the costs and time required to manage their businesses like larger competitors do.
Small to mid-market HVAC dealers are also at a competitive disadvantage compared to larger dealers. When it comes to money in the till, they have limited buying power and as a result are unable to obtain volume discounts which directly impact their profit margins. These dealers have little opportunity for recurring revenues unless the consumer signs up for home service plans or rental plans. DealNet frees these dealers from overhead worries, provides improved profits margins from sales and service contracts through its finance programs and allows HVAC dealers to focus on what they do best.
Over $7.9 billion is currently spent on mechanical improvements alone in Canada and DealNet expects to capture a significant share of that spend. It also plans to add additional loan products to increase their share of home improvement spending outside of HVAC.
All of this makes DealNet’s offering a win-win for both consumers and the businesses serving them.
So how secure is this financing game? First, let’s take a look at how DealNet powers its business model. Its financing platform is funded by its engagement segment. This established and highly successful business unit continues to grow. Having this engagement business in their pocket results in driving the cost of onboarding and servicing small and mid-market dealers down to a point where it becomes accretive to the overall business. Since the dealer is now the Company’s channel, DealNet benefits from low cost high volume originations and can capitalize on the high yield underwriting of the credit worthy consumer finance market while maintaining a loss ratio of under 2{92d3d6fd85a76c012ea375328005e518e768e12ace6b1722b71965c2a02ea7ce}, below industry benchmarks.
These finance programs provided through DealNet’s network of dealers will provide at least 10 years of recurring revenues and cash flows. Since DealNet launched its dealer financing programs back in January, the company has hit the ground running and is presently growing its dealer member base month over month. The Company is currently expanding its financial services team including adding sales teams to attract and on-board the dealers.
How will it reach this target? Well, in addition to direct to dealer programs, DealNet will continue to build its market reach through a series of strategic partnerships with leading HVAC manufacturers and distributors. This gives the Company access to its partner’s dealer networks and also provides DealNet with preferred pricing for HVAC products. Speaking about interest margins, this is a growing enterprise with strong interest margins which are expected to increase as it continues to add additional underwriters.
So what does the market think? Valuation seems to be a boon of the sector as comparable lenders hitting an average 21.4x LTM earnings and 1.7x book value with an average ROE of 9.6{92d3d6fd85a76c012ea375328005e518e768e12ace6b1722b71965c2a02ea7ce} (LTM). It would seem to me that if the market treats DealNet as it has classically treated its comparables, investors could see a phenomenal growth in their investment as DealNet, already capable of delivering $12 million per year in revenue with its BPO segment, leverages its recently announced $50.0 million credit facility to reach its targets through organic growth and several identified strategic acquisitions.
DealNet has the brainpower to get there with such large-cap board heavyweights as Dr. Steven Small who co-founded Newcourt Credit and Element Financial. The former provided hundreds of vendor programs to consumers and manufacturers. Michael Hilmer, President and CEO of DealNet, went on to illustrate, “Dr. Small took on the role of Executive Chairman and attracted outstanding directors including Harold Bridge, sitting chair of the Element Financial Audit Committee. Harold assumed the role of Chair of our Audit Committee. Harold is also our Lead Independent Director and is essential to ensuring that with our rapid growth we continue to stay within the boundaries of risk and governance ensuring long term profitability.”
“Another valuable addition was Brent Holden. Brent is a leader in the retail strategy and operations space, previously on the board of Deloitte and leading their retail industry group. Brent helps his customers find solutions to engage with their ever-changing customer set and provides strong insights and strategy as to where we take our engagement and financial solutions next.”
“Last but not least, there’s John Radford. John built the Ford Canada Red Carpet leasing business and helps us package our solutions for consumer consumption including marketing and branding of same. He also has a deep network of contacts in credit which we intend to tap as we hire the best-in-market people to scale our financial services portfolio.”
Landing this powerhouse board was a major achievement for DealNet, but the Company has more up its sleeve this year that investors can look forward to as Hilmer explained, “We up-listed this week to the TSX Venture Exchange and we are always looking at various acquisition opportunities. Another thing to note is that we are continually in pursuit of additional underwriting to fund our lending businesses and those strategies are maturing through 2015.”
Traders may be intrigued by the fact that DealNet is a unique player within the lending market with an incredible amount of upside potential. With capital markets preferring long-term revenue, yield and securitization based companies, DealNet has the capability of becoming a market darling with a growth rate dwarfing any other company within its consumer finance sector. Dr. Small has the track record and there’s every reason to expect that he’ll deliver on this next venture into the finance sector.
Development is behind it and DealNet has spent a worthy amount of time to place all of its ducks in a row. Now it’s time to execute its plan and grow into its potential. The challenge lies in scaling their operations to match their growth, but with the brain trust in place, DealNet plans to harness the tailwind to become a dominant player in the consumer lending market and provide their shareholders with something very pleasing to write home about.