Fat Prophets Hot Stock: FlexiGroup (FXL)

Tuesday 13th December 2016

Positioned for the upswing

What’s new?

FlexiGroup held its AGM a few weeks ago, and management rightfully reflected on a transitory few years for the company, which we agree sets it up for sustained gains in long term shareholder value. Four years ago, the company entered the interest free cards market following the acquisition of Lombard, adding further market share and scale with the purchase of Once Credit in 2013.

It was however a deal across the Tasman which has been a particular game changer. The $315 million acquisition of Fisher & Paykel Finance last March means that the New Zealand business is now one of significant scale for FlexiGroup. The business has over 430,000 cardholders (including the Q card and Farmers credit card).

As a result the kiwi business now accounts for around 44% of business volumes, and 450,000 out of the company’s 1 million customers reside in New Zealand. FlexiGroup holds much sway in the market and has established itself as the number one provider of technology leasing. At the AGM the CEO reported that integration of the business was well advanced, and on track.

Management also has strong ambitions for the company’s Irish business which they expect to account for between 8 and 10% of group profit (from less than 2% now) over the next three to four years.Management noted at the AGM that there was minimal competition within point of sale finance in the country, and FlexiGroup is the only provider of a rental/lease product. The CEO noted that if the company can achieve a 10% penetration with Irish retailers this will equate to a 100 million euro volume opportunity per annum. They are therefore optimistic of a significant volume impact in the FY18 financial year.

This perhaps not surprisingly has led management to consider FlexiGroup’s New Zealand business and cards as providing ‘the most substantial volume growth impetus.” Accordingly, we are encouraged by the groups’ focus on the core business units Cards, Certegy and Leasing. These areas account for 90% of the company’s volumes, with an addressable market estimated at around $250 billion.

The company has meanwhile exited lower margin non-core activities of Enterprise, Blink mobile broadband, and Think Office. This should bring bottom line, as well as focus benefits.

In terms of current trading management reported that trading for the first four months of FY17 had been in line with expectations. This has allowed them to reaffirm that (despite disposals) cash NPAT for FY17 would be in the range of $90 million to $97 million.

Outlook

Looking ahead we believe that a significant lift in receivables (up 47% on FY15) affords FXL significant operating leverage and will underwrite earnings growth in the years ahead. Management foresee a return to double-digit profit growth in FY18.

We continue to see the business as offering strong turnaround potential, under the guide of CEO Symon Brewis-Weston. Management have put in place a rational response to the competitive pressures experienced by the company in recent years, and have also made some savvy acquisitions, the fruits of which are going to flow through to earnings in the next few years.

Bottom line growth should also be underpinned by various restructuring initiatives, including a divestment of non-core, low margin businesses.

Longer term we also see margin pressure easing in line with the interest rate curve moving up. With interest rates likely to have bottomed, the amount of breathing space should improve somewhat for FlexiGroup and the financial sector generally.

Price

From a fundamental valuation perspective the shares are modestly priced in our view, at around 9 times FY17 earnings, with a dividend yield of 6 percent. This is complemented by FlexiGroup’s technical setup, with the recent share price gains expected to continue towards resistance located at $2.58 being the August high.

Worth buying?

Greg Smith is Head of Research at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

Comments from our readers

No comments yet