Wednesday, November 15, 2006


A new member on my watchlist is MRU Holdings (NASDAQ:UNCL) that recently moved to the Nasdaq from OTC mkt. The co provides private student loans to college students under its brand called "MyRichUncle."

According to public research, private student loan industry is one of the fastest growing mkts of consumer finance. Over the past 10 years, the use of private loans has risen 25% annually and approximately 40% per year for the past 3 years. Over the next 10 years, demand is expected to grow by 25% annually. Main reasons for the growth are demographic trends and the widening education funding gap. In the past, students received financial aid primarily in the form of federal grants and loans. Most grants are given only to families with annual incomes below $20K and typical grant covers less than 1/3 of tuition and expenses. Lenders typically turn away 70% of private loan applicants.

The backbone of MRU's strategy is its proprietary underwriting model for profiling loan applicants. Most credit providers assess consumer credit and the bankruptcy risk on student's or parent's FICO score. MRU thought this methodology did not provide enough coverage for younger individuals who have only brief credit history. The MRU model blends FICO with applicant's school, GPA, academic concentration and prior work experience. The thesis behind the model is that a studenst with high GPA at a top-tier school statistically yield good employment opportunities. The result is that MRU may approve loans to students who would otherwise be disqualified under traditional methods. B/c of the additional risk and lack of competing offers, MRU can price these loans at higher rate. For the students, those rates are still considerably more attractive than a credit card.

MRU expects to generate majority of its revs and income from interest income and residuals from the securitization of the loans. First, the co books interest income on the loans it originates while they are warehoused in the credit facility. Second, securitizations refer to the technique of pooling loans and selling them to a special purpose entity, typically a trust, which pays for the loans by issuing debt securities to investors.

Once loan originations ramp there is considerable operating leverage b/c a majority of costs are upfront and to some degree fixed, such as personnel, technology, and other infrastructure. Profit margins start to accelerate once the co crosses the breakeven threshold, which according to the Sanders Morris Harris, for MRU is approximately a $85m securitization. ThinkEquity puts breakeven point at a loan volume of approximately $100-$150m.

On Sept.29, the co reported that as of early Sept‘06, during its seasonally strong SepQ, it had originated $46m in loans, for a total of $85m in loans and well on its way to securitizing its first $100m in loans in the Dec ‘06 qtr. ThinkEquity sees the co securitizating another $100m in the Jun‘07 qtr, bringing total F07 loan volume to $200m. The co's goal is to do $100-150m in securitizations in C06, $300m or more in C07, and $750m in C08. Sanders Morris Harris sees the co doing $1.2bn by F2010. By Jun’08, with 2 securitizations per year, and approx. $700-800m of securitizations, MRU could be profitable in all four quarters.

ThinkEquity estimates that the co will break even in F07 (Jun.30), with EPS of $0.31. SMH sees F07 EPS at $0.36. With the stock trading around $6.5, the co trades at 18-21 times F07 profits. That is definitely cheap for a co growing that fast.

For abovementioned reasons, I would recommend buying the stock for a LT hold. Please do note that this one can be considered a highly speculative investment, and one should allocate only a small fraction of his or her portfolio into this one. Would look to exit the position when the stock doubles or at the end of F07 as expectations start materializing.

1 comment:

notablecalls said...

MRU (UNCL) reported last night results for 3Q. While reported EPS is well below estimates, this is not important.

Important is:

Vishal Garg, CFO and Co-Founder, stated, "Based on our success during the current quarter, over $85 million in private and federal student loans have been funded. We are further pleased to report that for the current quarter to date, in which we are continuing to fund borrowers who have applied in the recent weeks, we have exceeded well over $100 million in student loan originations."

First $100m ready for securitization. So, the co is at the break even. Well done.