Australia | Feb 09 2015
-Moderate growth still ahead
-Good value despite the rally
-Acquisition opportunities
By Eva Brocklehurst
Specialist finance business Flexigroup ((FXL)) delivered a firm interim result that was largely in line, or a little ahead of, expectations. Despite the certainty in the stock, brokers were somewhat mystified at the further rally in reaction to the results.
Credit Suisse suspects the unwinding of short positions was behind the response but, rally aside, considers the stock is attractively valued relative to its growth profile. The company has the means to deliver on expectations with increasingly diversified business lines, strong top line momentum, customer and product growth. The broker notes strong volumes in Certegy, the card payments business, while a change in strategy in enterprise leasing may be a headwind but makes long-term sense. There is increased competition in SME leasing too but the consumer segment, which is higher yield, should offset this in the broker's opinion.
Nevertheless, Credit Suisse is not expecting high growth, just 7-9% on average over the next few years. The stock offers relative earnings certainty at a reasonable price, although the broker does point out that impairments are likely to be "as good as they can get" and allows for a gradual increase over time.
The company has significant opportunities ahead with an ability to execute well, in Deutsche Bank's view. That said, the broker suspects growth may become harder to achieve than the impressive 14% compound rate witnessed since FY09. The valuation metrics are still undemanding so Deutsche Bank retains a Buy rating. Morgans concedes multiple drivers for earnings but believes subdued receivables growth will restrict the near term outlook. Earnings may be high quality but growth in organic terms is likely to be modest. Upside risk is via an acquisition but the broker is prepared to wait and see on that score.
Citi outlines four reasons to buy the stock. Firstly, diversification, which should drive profit growth. Next is the company's risk management expertise which has lowered funding costs. Flexigroup has completed six securitisations over the past four years which has meant its average cost of funds has fallen to 5.8% from 9.4%. Acquisitions providing both scope and scale are the third reason and the final is the strong correlation between receivables and earnings, which heightens visibility.
UBS found the results clean and expects the stock to be supported by the attractive yield, low funding costs and benign bad debt environment, although margin compression and competition remain issues. Visibility on the company's book should provide downside support as well. The broker notes the consumer financial basket re-rated considerably in the past three months but Flexigroup was left behind – even accounting for the recent rally – and earnings growth remains at the lower end of peer comparables on an FY15 and FY14-17 basis.
Flexigroup is good value in Macquarie's opinion, despite a 30% rally from recent lows. Earnings are typically weighted to the second half and the mid point of the guidance range suggest to Macquarie there is some head room, which may prove necessary if enterprise and SME volumes decline. The company has several products on the drawing board with a focus on digitisation, which the broker observes is cost effective and also improves the end user – customer and retailer – experience.
Goldman Sachs also envisages further upside as the company tailors its digital marketing, with VIP penetration a key profit driver for "No Interest Ever" (Certegy Ezi-Pay) . The VIP program now contributes 31% of Certegy's deal value.
The stock has four Buy ratings and two Hold on the FNArena database. The consensus target of $4.04 suggests 17% upside to the last share price. Targets range from $3.45 to $4.66. The dividend yield on FY15 and FY16 forecasts is 5.1% and 5.5% respectively.
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