Small, Smaller, Smallest

Rifco grants loans at sub-prime rates within the automotive repair, auto purchase and heavy duty truck repair markets. According to Rifco ... "These markets already generate over a billion dollars in annual non-prime loans and each are growing." The company derives revenue from its own loan book, from securitizing loans (which it then manages), and by recording other income (primarily health and/or life insurance fees) relating to the loans.

Here are some recent notes I made about the company:

Recent price: $0.45 to $0.55
Shares O/S: 16.1m
Market capitalization: $7.2m to $8.9m
Year end: March 31 2006 (2006 year end)

Business Factors:

• At y/e, the company had 670 active enrolled loan orgination locations in four provinces in Canada, primarily in Alberta and Ontario. In the fourth quarter of 2006, Rifco announced it had reached marketing agreements with three national auto repair chains, representing about 350 new points of sale. Early in the second quarter of 2007, they also announced they had signed an agreement with TOROMONT CAT for 19 (commercial engine repair/replacement) locations, that they estimate will produce some $5m in annual loan orginations.
• Finance receivables total some $15.6m at 1stQ'07, with the ultimate goal for 2007 year end at $25m.
  
• The recent trend in loan originations can be seen here:

but this positive trend has stalled in the first quarter of the '07 year (ending June 30 2006) with another $4.6m figure. However, a decline also occurred in 1Q2006 vs prior Q, with orginations then ramping up thereafter, (but not in 1Q05).

• The big money in the loans is in the commercial repair category, with an average inital balance of $19,000, followed by vehicle purchase at $11,700, and then finally automotive repair at $2,400. Over the past year, the average loan size on the commercial repair category and vehicle purchase has increased by 20-30%. Interest rates are around 22-23% for the commercial repair and vehicle purchase, and around 28% for auto repairs.
• According to the company, collections have increased significantly 2006 vs 2005 due to improved personnel, techniques and software. These changes have had a significant impact on delinquency with the loan arrears over 30 days reaching 2.33% at year end, a reduction of 1.99% over the prior year’s 4.32%. This trend continues into the first quarter of 2007, with a rate of 2.03% being achieved.
  
• Operating expense ratio has a very favourable trend line; for all of 2006 it was 18.1%, with the fourth quarter of 2006 clocking in at a then record low 16.75%, followed in the first quarter of 2007 by another record ratio at 13.4%.
• Rifco's average cost of borrowing has been moving up slightly, but is still well below 10%. Moderate balance sheet leverage, considering business, of 3:1.
  
• Some further quarterly statistics are located below:

and even though loan originations stalled in the 1Q07, revenues continued to climb to $1.51m.

• All-in-all, most parts of the business appear to be improving on a quarterly basis.
• The company recently selected a new web-enabled software system to originate loans (applications are currently faxed) should be completed in/by the third quarter, which should enhance further growth capacity and customer service; in the interim, it's very possible this will be a short-term headache and distraction, as if often the case with these conversions.
  
• Corporate goals for 2007 include a doubling of loan originations to $25m, doubling managed loans to $26m, increasing revenue to $7m, write off's below 5%, and achieving a net income of $700K (around $0.039/share).

Year-over year:
# Revenue/net earnings/EPS in 2005: $3.82m, $336K, $0.03
# Revenue/net earnings/EPS in 2006: $3.88m, -$245K, -$0.02

Revenue of latest four quarter versus four quarters prior to that is $4.6m versus, 4.0m, by the $4.0m also included the very first tranche of securitized loans. If this is normalized, then that figure would drop to, say $3.6m, indicating an approximate revenue growth rate of 28%.

The company announced a good 1Q07 compared to 1Q06. The company has had positive operating net income the past two quarters of around (adjusted) $246,000, or about $0.014 per share.

Taxes are appear to be being paid at full rates.

Share overhang issues:
Outstanding stock options: 1.04m, with a weighted average price of $0.60 and a life of 2.8 years. Further grants of some 240,000 shares subsequent to 1Q07 end were also granted to senior officers, at $0.55 per share, for a period of five years. Some 3.35m warrants are also outstanding.

Value/Valuation/Shareholder Alignment: Positive/Negative
Dividends: Nil. Neutral, given state of development and earnings and cash-flow of company.
Management/Directors/etc. corporate ownership: The CEO and CFO with approximately equal ownership positions hold about 19% of the shares. Positive.
Options/warrants issues: Lots of warrants outstanding. Lots of options being granted. Decidedly negative.
PE Ratio: Around 18, if the past two quarters are annualized, and the price is assumed at $0.50. (Actual 12 month trailing PE much higher, due to net losses two quarters prior to recent two). Marginally Positive
Growth: Revenue growth continues at a fairly rapid pace, which should drop down to the accelerate bottom line trends. Positive.

Overall positives: The positives are the general evident trend lines in the business, and the significant insider ownership. Revenue continues to grow, with the latest quarter clocked in at $1.5m, which is 38% of what the business did in it's entirety last year.

Overall negatives: The positive trend line of net earnings hasn't been long established. Options and warrants: is Rifco 'giving away the farm'?

Questions: Can Rifco deepen it's relationship with the vendors it has signed onto it's origination program: this will be the key to further profitable growth.

Expectation (overall upside/downside): If expectations for growth as indicated in the annual report can be met, this should provide an extremely profitable platform going forward for further volume. Should this occur, the possibility exists that the stock could double over the next 18-30 months. On the other side of the coin, if the business stalls out - like what happened last year, then the stock price might decline by a further 20-40%.

I have recently completed a fill order for a medium amount of this stock at an average price of just below $0.49.

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