Australia | Feb 12 2013
By Andrew Nelson
Leasing and financing services specialist Flexigroup ((FXL)) put out yet another positive financial report last week and brokers did what they tend to do; they applauded the report, maintained their Buy calls and lifted their forecasts. But Buy calls can’t last forever and earnings can’t be perpetually upgraded, or can they? We take a good look broker commentary to see why forecasts and recommendations have been and remain incredibly positive.
It’s easy to pin down at least one reason why brokers responded well to last week’s interim report. As Credit Suisse noted, first half numbers put the company on track to hit the upper end of management’s 11%-16% earnings growth guidance range for FY13. However, the broker can easily one-up that achievement, noting current underlying organic growth is actually running at around 17%-20%. Thus, Credit Suisse thinks FY14 EPS estimates, if anything, are too low and is pencilling in 20% EPS growth for the period.
UBS pegs the result at 16% profit growth on last year’s first half and this is despite up to $4m being spent on new products and efficiency programmes. The broker notes that Certegy was once again the major contributor of growth. It now accounts for the bulk of the company’s revenue and has also pushed the total book past $1bn for the first time ever.
The broker figures the current net profit growth rate at 14.8%, which compares quite favourably to guidance at 11%-16%. No wonder UBS thinks the FY14 target should be an easy hit. What’s more, the broker is also expecting more progress on efficiency gains in processing and Lombard, which further supports the double-digit growth forecast for FY14. UBS also sees further ABS issuance over the next 6-9 months, meaning funding costs will continue to decline.
Incoming CEO Tarek Robbiati summed it up nicely, saying there is “no need to change a winning formula” and UBS agrees heartily. In fact, the broker expects new product innovation and organic growth will remain the priority. Thus while the stock has admittedly re-rated in the not too distant past, the values of the book, M&A opportunities and the potential of new products mean a Buy is the only right call, says UBS.
Deutsche Bank is a little less glowing in its assessment, with net profit coming in 5% below the broker’s forecast. The miss was mainly due to higher costs and weaker volumes at Flexirent, although Certegy profit was also a little weaker than expected due to additional marketing cost. However, the broker also thinks any concerns about a slightly soft Certegy are unfounded, given the improved returns expected in the second half.
The broker also notes that volume growth is at this point a much better indicator of performance and given this is running at 22%, upgrades to FY14 earnings are warranted. Of note is that emerging areas of the business are also performing, with UBS seeing this as building a solid platform for continued earnings growth over the mid-term.
Analysts at Macquarie are also big fans of Certegy and on their numbers the 31% lift in net profit, the 22% lift in volume and the 29% rise in receivables added up to a very strong result. Lombard is starting to make a more substantial impact, and lower borrowing costs from securitisation and reduced base rates are starting to filter through.
The broker expects the company’s newer initiatives, which leverage current core infrastructure, will soon be providing another leg to growth. Much like Credit Suisse, Macquarie also thinks near term PE multiples appear a bit full, but much like Credit Suisse, Macquarie also remains attracted to the FY14 earnings growth on offer.
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