Small Caps | Aug 09 2011
– Flexigroup delivers solid full year result
– Diversity, new product categories offsetting tough trading conditions
– Guidance for FY12 suggests confidence in earnings
– Brokers retain Buy ratings
By Chris Shaw
Flexigroup ((FXL)) provides vendor and retail point-of-sale finance and telecommunications services, with operations in Australia, New Zealand and Ireland. The company yesterday announced full year earnings of $51.8 million, a result broadly in-line with market expectations and guidance from management.
Given the challenging retail environment, stockbroker Moelis takes the view the result by Flexigroup was a solid one. UBS agrees, seeing net profit before tax growth of 23% in year-on-year terms as impressive given the current weakness in retail sentiment.
The result also highlighted the benefits of Flexigroup's diverse range of operations. As Goldman Sachs points out, 37% of group net profit was generated from businesses created or acquired in the past three years.
This means while product price deflation in the IT and electrical sectors continues to be a major headwind, Goldman Sachs notes this is being more than offset by entry into new product categories in both the Flexirent and Certegy businesses.
As examples of the benefits of moving into new product categories, Goldman Sachs notes deal value in Certegy was up by 30% and in Flexirent by 6%. The growth in the former was largely driven by solar and fitness equipment, while gains in the latter were driven by trade and refrigeration equipment.
Growth looks set to continue, UBS pointing out management intends to pursue new internet offerings such as deferred payment processing for business. Distribution relationships are likely to be the key to growth in this area according to UBS.
There should also be growth from existing operations, Moelis noting Flexirent Commercial tripled lease volumes in FY11 thanks to maturing relationships with vendors. Further maturing of these relationships should generate additional growth, especially as Moelis sees this market as becoming less competitive.
Despite current uncertainty in the Australian retail sector in particular, management at Flexigroup has enough confidence to offer earnings guidance for FY12. Guidance is for net profit growth of 12-15%, which Goldman Sachs notes implies a cash result in a range of $59.2-$60.8 million.
Earnings estimates have been adjusted to reflect this guidance, Goldman Sachs lifting its forecasts by 10% and UBS by 4%. In earnings per share (EPS) terms the broker now expects 21.3c in FY12 and 22.6c in FY13, while Moelis is forecasting EPS of 20.4c and 22.8c respectively. Consensus estimates according to the FNArena database stand at 22c for FY12 and 26.3c for FY13.
Goldman Sachs estimates Flexigroup is trading on earnings multiples of 8.6 times in FY12 and 8.1 times in FY13, which are discounts to the Small Industrials index of 17% and 10% respectively. This discount is despite Flexigroup being expected to deliver 9% capitalised annual growth in EPS over the next three years.
This is before any acquisitions, which are possible according to Goldman Sachs given $86 million in net cash available.
This value makes Flexigroup a Buy at Goldman Sachs, a view shared by Moelis, UBS and Macquarie.
The consensus share price target according to the FNArena database is $2.35, while Moelis has a target of $2.10 and Goldman Sachs of $2.46. The consensus target implies upside of better than 40% from current share price levels.
Shares in Flexigroup today are weaker on another very weak day for the Australian share market. As at 11.00am the stock was down 20.5c at $1.625. This compares to a trading range over the past year of $1.175 to $2.39.
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