Small Caps | Oct 05 2012
By Eva Brocklehurst
Leasing and rental finance company FlexiGroup Ltd ((FXL)) has piqued the attention of several brokers recently with a strong outlook amidst a difficult operating environment. Overall reactions to the stock's trajectory have been substantially positive with Buy ratings from the four brokers which cover the stock on FNArena. The key finding is that this company has been able to steer a course of increasing profitability. It is adding to its accounts receivable on its interest free loans and retail point of sale leasing at a time when retailers are floundering and obtaining credit from the major lenders is a vexed issue.
FXL has been characterised over recent years by firm and profitable growth as it expanded its financing and telecommunications offerings, which it has in Australia, New Zealand and Ireland. It provides point of sale services within diverse industries and has a network of around 11,000 merchants and strong relationships with its retailer partners, such as Harvey Norman ((HVN)).
This stock has ticked the right boxes for Deutsche Bank which has initiated coverage. It joins the others in the FNArena database which are upbeat with Outperform and Buy ratings. Deutsche has set a target of $3.70 with a Buy signal, against the consensus target price of $3.60. Consensus earnings per share (EPS) are for 25c in FY13 and 25.6c in FY14. The database shows consensus forecast earnings growth of 16% in FY13, flattening out to 2.4% in FY14. Dividends are expected to grow by 8.2% in FY13 (4.1% yield) and by 9.8% in FY14 (4.5%). Deutsche believes FXL's access to capital, bank and asset backed securities has allowed it to meet demand for credit that its competitors have been unable to provide. This sort of access and growth much mean FXL is winning increasing market share. Forecasting annual EPS compound growth of 13% over the next three years and an average return on equity of 29% over the last six years, Deutsche believes FXL should trade at a premium to its peer group average of 12.6 times.
The company operates one of its businesses under the brand Certegy Ezipay in Australia. That entity's cash net profit rose in FY12 by 60%. Since it was acquired for $31m three years ago it has doubled its receivables to $357 million. According to Deutsche, that business has been successful on several measures as it delivered a return on capital of 42% and group earnings per share growth of 50% over that time. Meanwhile, the company's Lombard division, acquired in July this year, provides interest free finance through a number of retailers and Visa cards, and cross selling of Visa card into the FlexiGroup base started last month. Deutsche said the Lombard business is in a similar vein to Certegy although it lacks the capital underpinning it. Nevertheless, with FXL's access to capital, IT and marketing the broker forecasts a success story along the Certegy lines.
Another key business, Flexirent, a retail point of sale leasing business, has diversified into the non-retail business-to-business sector and posted improved receivables of $358m in FY12. FlexiGroup also diversified into the large online market with its 2012 acquisition of Paymate (an online payment processing business). Certegy, Paymate and the start-up Flexi Commercial and Blink mobile broadband businesses today contribute 45% of FlexiGroup's net profit. The company outperformed broker estimates for FY12 profits. It offered a fully franked final dividend of 6.5c per share which, together with the 6c interim dividend, represents dividend growth of 19%. Macquarie has given the stock an Outperform rating underpinned by its earnings outlook – its profit guidance growth of 11-16% for FY13 – and potential for new initiatives. Managing director John DeLano, who joined FlexiGroup in September 2003, will depart at the end of this year. UBS notes this does provide an element of risk going forward but the stock does still retain much value with its high quality earnings. DeLano will remain a consultant to FlexiGroup in 2013 and 2014.
Several analysts suggest the main risk to its outlook, of course, is a further deterioration in retailing. Consumers have restrained spending in their new conservative leanings towards less debt but there are still items that need to be bought and the cash-less society is well established. A company with substantial share of the transaction market should not be worried. An upswing in unemployment, also, could cause a ballooning in bad debts. Nevertheless, the market in which FXL operates is significant in size and it should be able to withstand such a scenario.
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