Australia | Mar 05 2015
-Doubles size of NZ book
-Diversifies exposure
-A catalyst for re-rating
By Eva Brocklehurst
Leasing and lending business Flexigroup ((FXL)) has added another layer to its services in New Zealand. The company has purchased Telecom Rentals, which provides IT and telco equipment leasing to the commercial and government sector. Brokers applauded the acquisition, which builds on the company's most profitable market, doubling the size of its NZ book.
The acquisition provides increased scale, enhanced distribution and a diversified exposure in Credit Suisse's view. While little earnings impact is expected in FY15, the broker expects around 3% earnings accretion in FY16. With this acquisition Flexigroup expands from a mostly retail exposure to government and enterprise. Synergies should come from the benefits of lower cost of funds when applied to the expanded book. Telecom Rentals has a leading market position in New Zealand and there is also first right of refusal on the former owner's, Spark Digital, business.
When combined with Flexigroup's existing leasing business, this acquisition makes it the leading player in SME/enterprise leasing in New Zealand, a strong position in an attractive market, brokers contend.The price of NZD106m comprises NZD92m in net tangible assets and goodwill of NZD14.5m, with an existing receivables book of NZD97m.
The acquisition fits a low risk/high return capital allocation that has worked well for Flexigroup, in Deutsche Bank's view. Despite being in a phase where organic growth will be harder to achieve the broker maintains the company still boasts significant market opportunities along with the capability to execute. Cost controls are good and the lower funding rate provides a tailwind. Valuation metrics of the stock are undemanding and Deutsche Bank believes this acquisition is a catalyst for continued re-rating.
Profit metrics for Telecom Rentals appear below Flexigroup's own metrics, implying room for significant uplift in profit and returns. Deutsche Bank is confident Flexigroup can operate this business more efficiently, noting the higher profitability it achieves in its Australian enterprise business which involves a more competitive market.
The NZ business remains a relatively small part of of the overall portfolio but has stood out in terms of growth rates since FY11, UBS observes. Having said that, the broker notes the margins of this latest acquisition are a lot lower than Flexigroup's existing NZ portfolio. Still, the outlook bodes well for Flexigroup generally, with the more diverse suite of products now on offer. UBS finds the stock supported by an attractive yield, low funding costs and a benign bad debt environment. The risks lie with the solar and enterprise business beyond FY15, while margin compression and competition remain ongoing issues.
On FNArena's database Flexigroup has four Buy ratings and two Hold. The consensus target is $4.10, suggesting 11.9% upside to the last share price. Targets range from $3.56 to $4.66. Dividend yield on FY15 and FY16 forecasts is 4.8% and 5.3% respectively.
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