Australia | Aug 12 2013
-Visibility high on outlook
-Commitment to diversity, innovation
-Credit cards to provide more growth
By Eva Brocklehurst
A strong FY13 report and the good reviews keep coming for Flexigroup ((FXL)), with the company also providing a rare untrammelled outlook. The diversified finance and leasing operator is on track with plans to be a full service finance provider to retailers and small-medium enterprises. Flexigroup has posted its fourth year of double digit earnings growth.
FY14 is looking healthy and, with the company's track record of delivering, brokers see the stock's premium as justified. Non-solar growth is solid and while the Certegy slowdown is occurring sooner than expected, as solar volumes are declining with rebate reductions, factors such as higher electricity prices are likely to keep the growth curve positive. There's also a high level of repeat business. Credit Suisse notes profitability in Flexi Commercial provides scope for lower margins and there was another large account win in the interest-free segment. Synergy and efficiency gains lead the broker to expect benefits from Flexigroup's winning mix will continue, despite worsening overall credit quality based on macro expectations.
Certegy was again the star performer with 13% volume growth and 18% receivables growth in FY13. Key contributors were solar and the retail and home owner sectors. The absence of government subsidies for solar panels was missed in the second half, with new volumes falling by $37m half-on-half. Non-solar volumes increased 11% and the VIP program also provided an offset. Macquarie expects Certegy growth rates will slow going forward as the lumpier solar contracts provide tougher comparatives. Despite this, only 13% of Australian households have solar panels and significant penetration is possible over time. The Certegy business signed 847 new merchants, predominantly in the outdoor living, and home-owner segments as well as a new relationship with Rebel Sport. Rental bonds have also been flagged as a new area of focus. Certegy profit increased 26% for the year to $27.5m.
The stock may not be as cheap as it used to be but UBS likes the visibility and commitment to product innovation. As Flexigroup is trading on 15.3 times FY15 earnings forecasts, UBS sees opportunistic acquisitions as the likely catalyst. Flexigroup has re-rated to a market premium valuation, but the broker argues earnings quality is higher than it has ever been. There's also the embedded nature of Flexigroup finance products with retailers, OEMs and distributors. Another aspect brokers like is the nimble nature of Flexigroup, which has acted quickly to support successful initiatives and just as quickly to limit losses on those that weren't such a good idea. A return on equity that's over 20% is also testament to management's considered use of capital, in UBS' view.
Profitability has exceeded Deutsche Bank's expectations in all key divisions, while impairments, new retail partnerships and cost control were all positive. This provides a high degree of visibility for FY14. Deutsche Bank expects credit cards will underpin FY14 growth. The broker is confident enough to put FY14 forecasts ahead of the guidance range by 3-6%, expecting profit around $89m. Macquarie expects the credit card initiative to leverage the core infrastructure as well as provide another leg to growth in coming years. The company is also accelerating the online business to provide additional services to retailers.
Flexigroup has four Buy ratings on the FNArena database from four covering brokers. The consensus target price of $5.01, suggesting 16.6% upside to the last share price, has risen from $4.65 ahead of the results. Price targets range from $4.81 to $5.25 and there is a 3.8% dividend yield on FY14 consensus earnings estimates and 4.2% for FY15.
The value in the stock is summed up by UBS in that the skills in credit scoring, collections and funding can all be applied to a variety of finance products and further acquisitions can be added with genuine leverage to receivables growth. This also adds up to barriers to entry in terms of competition. There must be risks. Yes, one relevant to all credit providers. Arrears rates on receivables present a risk to earnings and this could be driven higher by increasing unemployment. There's also product price deflation or poor execution but these do not seem major points of contention for Flexigroup.
See also, Why Flexigroup Equals Flexi-Buy on February 12 2013
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