Flexigroup Spending To Grow

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-Hard to replicate prior growth
-Higher costs reduce earnings estimates
 

By Eva Brocklehurst

Leasing and finance service provider Flexigroup ((FXL)) is an example of a stock for which robust growth over several years tends to overshadow the outlook, no matter whether that too is still strong. Brokers are mindful that the share price has fallen away over recent months and maintain there's good value in the stock. The company held an investor briefing recently to update on growth strategies and new products and, while broker spirits were lifted, a degree of caution still prevails.

To Goldman Sachs it's obvious the business is changing. Flexigroup is moving into lower risk customer segments and with this comes lower margins but also lower bad debt rates, lower funding costs and lower capital intensity. Hence, net profit growth will likely lag receivables growth. Goldman is not perturbed by this because a decline in margins is due to a shifting of the mix rather than any change in profitability. The broker notes the fall in profit margins, as the business shifts to lower risk segments such as interest-free cards and commercial leasing, is expected to be offset by 5-20% annual value growth in all business outside of consumer leasing. The Certegy business, the company's card payment services, offers considerable growth potential from better penetrating the existing markets, in Goldman's view. FY15 forecasts are revised lower by 3% but the broker adds 1% to FY16 and retains a Buy rating, given the stock is trading on a FY15 price/earnings multiple of 12 times, which is a 23% discount to the Small Industrials.

When FNArena reviewed the stock in the wake of the FY13 results the company had just posted its fourth year of double digit earnings growth and there were four Buy ratings on the database. There are still four Buy ratings. No Hold and no Sell. The consensus price target is $4.73, suggesting 29.8% upside to the last share price. This compares with $4.78 ahead of the latest update. Targets range from $4.45 (UBS) to $5.00 (Credit Suisse). The dividend yield on FY14 and FY15 forecasts is 4.6% and 5.0% respectively.

CLSA likes the new initiatives but thinks there's a big cost increase to recoup and investors may be cautious about pricing in too much growth for FY16 just yet. New initiatives include a rental bond product for Certegy, a new mobile plan bundle launched in conjunction with Harvey Norman ((HVN)), new retail and enterprise platforms enabling faster processing and a new Paymate on the Go. One new development is the expansion of Certegy further into New Zealand via the acquisition of Equico. Still, earnings expectations are lowered so CLSA retains an Underperform rating. CLSA has decided to reduce its target to $3.80 from $4.30 but acknowledges valuation support has not changed significantly. What the broker has imposed is an additional discount for the near term, recognising a headwind from downgraded earnings forecasts.

Management believes an interest free cards business has the potential to be the next Certegy in terms of growth. This is an area where Flexigroup sees a gap in affinity marketing which the banks do not fill, reflected in its co-branded card with Dick Smith ((DSH)). Macquarie observes a recent de-rating amidst concerns around growth and recent acquisitions and thinks organic growth could be softer while the cards business ramps up. The broker acknowledges such growth potential exists but remains sceptical regarding the time it will take for the business to gain momentum.

UBS considers the company is doing well but also believes will be hard to replicate the growth in coming years. UBS thinks many are discounting the cyclical support the company will obtain and expects additional growth avenues will come from the interest free cards and enterprise/SME leasing, more market share gains in solar and the potential entry into solar storage. The company's track record with acquisitions has also been disciplined and value accretive, in UBS' view.

IT and digital platforms are increasingly important for the company to stay in front of the industry and management has noted that IT investment is likely to rise to 9% of income in FY15, from around 4-5% in FY13. UBS believes this is necessary to support growth in coming years but earnings forecasts need to be trimmed marginally to factor this in. The broker thinks the stock is attractive at current multiples, despite the more moderate growth profile and the additional costs. This may warrant a de-rating but UBS is comfortable with the risk that is factored into the price at current levels.
 

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