Australia | Jun 01 2016
-Earnings growth to take time
-Dividend yield the mainstay
-X-Pay product to support growth
By Eva Brocklehurst
Financial services business Flexigroup ((FXL)) is tidying up. The company intends to divest or discontinue poorly performing segments and focus on its core operations. While one-off charges have led to a mild downgrade to FY16 forecasts, brokers believe more of the risks are now priced into the stock.
Still, the company has a way to go to convince Macquarie, who is downgrading the stock to Neutral from Outperform. The broker notes the guidance downgrade represents the third straight year of little organic growth. The company expects FY17 cash profit around $100m from continuing businesses while volumes are expected to accelerate in FY18.
Macquarie accepts the stock could appear good value to some, trading on a FY17 price earnings ratio of 7.7x, and the dividend yield is attractive at around 7%, but suspects actual earnings growth is likely to take time. Moreover, the broker contends the main swing factors are the affordability time frame for the solar batteries market in the case of Certegy and the commercial/small-medium enterprise (SME) turnaround in the company's Australian leasing segment.
Citi also observes the transition in the company has been going on for 12 months but suggests most risks are now priced in, upholding its Buy rating. The exit of the non-core businesses is considered a positive development as it will focus management on its key consumer and SME financing. Citi also believes the fully franked dividend yield, circa 7%, is sustainable.
Flexigroup has stated it will post a number of one-off adjustments in FY16 including write-downs and provisioning. Systems and goodwill write-offs will total $18.4m while a provision will be raised for the Enterprise segment of $15.7m.
The company will exit Enterprise, Think Office and Blink, which will contribute a combined $10-12m in earnings in FY16. There will be a 3-month contribution from the F&P Finance acquisition of $6m. All up, stripping this out and other non-core contributions from FY16 and FY17 estimates suggests to UBS that there has been an erosion of 4-6% in the base business.
The company has a 10-12% volume growth target for FY18 in NZ cards & leasing, Australian cards & leasing and the Certegy business. UBS observes, while there are a number of initiatives in place across various business segments, a significant step up is required in Certegy and Australian leasing to achieve this.
There are also risks around further impairments, higher funding costs, margin compression and competition. This weighs on the outlook and, while the valuation appears undemanding and earnings expectations have been re-based, UBS stays on Neutral.
Strong valuation support and metrics which do not require much growth to be justified are the reasons Deutsche Bank has a Buy rating. The challenge the broker envisages centres on gaining comfort with the volume targets, given few details were provided. The targets are, nonetheless, achievable and Deutsche Bank likes the opportunity in Certegy around solar storage.
Moreover, the exit of the non-performing operations is a reasonable strategy, most are profitable, and the broker estimates the run off of the Enterprise book alone should generate $20m in cash, which could be better used across higher-returning segments.
Still, Deutsche Bank acknowledges near-term catalysts appear elusive. Excluding the F&P Finance acquisition and the businesses being discontinued, FY17 is expected to generate $80m in cash profit, similar to FY16, which the broker believes is a conservative estimate.
Flexigroup will launch X-Pay, a new no-interest re-payment plan for purchases under $1,000 within online shopping carts and in-store. The company expects to be able to leverage its established partner network and credit pricing capabilities as well as low-cost warehouse funding.
Macquarie observes the new CEO considers the delivery of X-Pay as a first step to improve investor confidence in management's ability to deliver on growth targets. The broker believes the product is an interesting development and will watch progress closely, noting it is a high volume/low value offering which will take some time to build up scale.
Credit Suisse welcomes the clearing of the decks. While momentum is negative and headwinds continue, the broker believes this is still a high quality, growing business. The opportunity to fix some self-inflicted problems is being tackled and, while some new products are needed, the broker believes this is close to the bottom for the stock.
The discontinuation of the non-core businesses suggests both returns and risk profile will improve and the sale of some of the units will also deliver cash flow. Hence, Credit Suisse also suspects the FY17 forecasts are conservative. The broker understands that, in forming its FY17 outlook, the company has an unchanged view on F&P Finance and related synergies and assumes no significant change in impairment ratios.
FNArena's database has four Buy ratings and two Hold. The consensus target is $2.47, suggesting 20% upside to the last share price. This compares with $2.87 ahead of the briefing. Targets range from $2.17 to $2.78. The dividend yield on FY16 estimates is 7.2% and on FY17 it is 7.4%.
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