Profitability drive could prime Propell's share price

The share price of ASX-listed fintech company Propell Holdings Limited (ASX: PHL) could receive a boost from ongoing efforts by executives to bring the platform into profitability.

The company may currently be a bargain and has ample room for a rebound, given its share price recently dropped to record lows despite cash burn continuing to decline and improvements to loan book quality.

Cash burn continues to dwindle

Propell focuses on the provision of financial services to small businesses via an 'all-in-one finance platform' that it claims is the only one of its kind in Australia.

The company says its app enables small and medium-sized enterprises to obtain near-instant approval for loans, making it far quicker and easier for them to access the capital needed to run their businesses.

In its Q2 FY24 trading update, Propell highlighted efforts to achieve near-term profitability by cutting down on its cash burn.

Operating costs fell 20% on the previous comparable period (PCP) to $647,000, while underlying operating costs dropped 28% on PCP to $587,000. Net cash used in operating activities excluding cost-cutting measures fell 32%.

CEO Michael Davidson said the sustained drive to reduce costs arrives following a growth binge during the early days of the Covid pandemic.

'We went down that path and acquired customers as rapidly as possible, spending enormous amounts chasing these customers along with every other fintech,' Davidson said to Stockhead.

'It's been an 18-month journey to narrow our focus on products that customers demand but are also commercially viable for us and, at the same time, remove a significant amount of costs from the business.

'I'm excited at this point because we are essentially coming out of that journey into a very low-cost, quite high margin and now very scalable business that is well-capitalised through recent capital raises.'

The effectiveness of the cost-cutting drive arrived in tandem with a drop in customer receipts. Q2 FY24 receipts from customers fell 21% on PCP to $253,000.

The cash loss in Q2 FY24 was $394,000, for an improvement of 20% on PCP. This improvement rises to 32% when one-off transaction costs are excluded.

Despite signs of improvement, Propell's shares have weathered a beating since its listing several years ago

Its share price has plunged from over 20 cents at the time of its oversubscribed IPO in April 2021, to a low of just 1 cent in January 2024.

Loan book improves in quality

In tandem with its efforts to cut costs, Propell has also sought to improve the quality of its loan book and cap losses.

The company says it's continued to enhance credit assessment criteria in response to a rise in arrears in early FY23.

These efforts appear to have paid off, with early arrears on loans written in Q1 and Q2 FY24 dropping to zero despite trying economic conditions.

The introduction of more rigorous credit standards has also had the effect of slowing growth in Propell's loan book by raising the rate of application declines.

Given Davidson's emphasis on moving away from its earlier expansion binge, Propell contends it has now adopted a 'prudent approach to loan book growth' which is 'more sustainable' and will '[deliver] superior commercial outcomes.'

Stricter standards arrive in tandem with a sizeable rise in average loan size, with a 50% on PCP increase to $36,000.

Capital raising and new trade product

Davidson expects Propell to achieve profitability once its loan book reaches the $6.5 - 7.5 million scale, necessitating further capital raising.

The company has been in discussions with wholesale providers of funds to raise its current wholesale facility limit of 7.5 million, in a bid to drive customer lending and growth in revenue.

Propell has also raised funds for the launch of a new trade finance product, alongside working capital needs and corporate costs.

On 18 December 2023, the company announced that it had received. commitments for a share placement to raise $1000,000 before costs.

The trade finance product focuses on support for SMEs in the renewable energy sector, and saw its first customer drawdown in November 2023. Funds were repaid within 30 days, reaping an annualised interest rate of 36.5%.

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