Small Caps | Jan 19 2012
By Greg Peel
Second hand goods retailer and financial services company Cash Converters ((CCV)) had emerged from the dust of the GFC as quite a success story for a small company trying to shake off its earlier image as a cheapo hock-shop for the down and out. Offering an attractive yield, the CCV share price ran up from under 60c in September 2010 to 90c by early 2011.
It was not just about a lick of paint and some fresh advertising. CCV had set about trying to reinvent and rebrand itself with a less derogatory image in a time of household hardship which extended well beyond the disadvantaged. The company began a program of corporatising many of its franchised stores, tarting up its second hand goods buy/sell business and opening non-intimidating loan service counters within, offering both secured and unsecured personal loans, pawn broking loans and cash advances. With the stigma somewhat removed, CCV began to thrive and was soon on the radar of investors seeking reliable yield.
The crunch came, however, when a parliamentary committee recommended strict reforms for the micro-credit industry in an attempt to clamp down on predatory lending practices and unreasonable rates of interest. CCV was caught in the wash and its share price had fallen to 40c by October last year.
“Cash Converters has a long and established track record for earnings growth,” notes Microequities analyst Shuo Yang. “The market has punished the company in light of the proposed federal government legislation on payday lenders and the withdrawal of the tie-up with EZCorp. Microequities believes the steps taken by management to shield the company from potential regulatory threats means the medium to longer-term investment case remains”.
CCV currently runs a total of 97 corporate-owned stores and 552 franchises across Australia and the UK and in other international locations. Ongoing store rollouts and acquisitions are expected. This, along with the introduction of financial service products into all UK stores, should offset most of the negative earnings impacts of the proposed credit reforms, says Microequities. CCV's lending services sector has grown to 28% of revenues as the company has worked to enhance its business model.
Microequities believes the earlier share price damage offers the potential for considerable upside once short-term concerns are alleviated. The analyst has initiated coverage with a Strong Buy recommendation and a price target of 78c noting the stock is valued at a significant discount to international peers. CCV last traded at 52c.
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