Australia | May 04 2017
The underperformance of one of credit provider FlexiGroup's key businesses, Certegy, has left brokers unsure about the near-term outlook.
-Key initiatives scheduled for June, including Oxipay and the Ireland project
-Certegy growth slowing, reflecting increasing competition
-Target volumes for FY18 and double-digit cash net profit growth envisaged a stretch
By Eva Brocklehurst
FlexiGroup ((FXL)) has lowered the top end of its guidance range for FY17 cash net profit to $90-93m from $90-97m, primarily stemming from the underperformance of Certegy. At the mid point this implies a downgrade of -2%. Australian cards, which are 52% of group receivables and 39% of group cash net profit, continue to deliver strong growth while Certegy, which is 24% and 37%, respectively, is behind expectations.
The company expects underlying trading in the fourth quarter to be robust and key initiatives include the launch of Oxipay and the project in Ireland going live. UBS lowers FY17-19 forecast by -2-3%. Citi lowers cash net profit forecasts by -5-8% for FY17-19 and reduces Certegy profit forecast by -8-17% ,as well as factoring in increased spending in Ireland.
While earnings growth remains elusive, there are signs of a turnaround, in Deutsche Bank's view. The company has refreshed its strategy, which centres on exiting businesses and re-establishing growth. Certegy volumes are stabilising, the broker asserts, while commercial leasing is rebounding. Australian cards are growing strongly, which is somewhat offset by a flat NZ business.
Despite a continuation of negative news flow and the lack of clarity around a resumption of earnings growth, Deutsche Bank continues to believe the stock offers strong valuation support, which does not require much growth to justify.
Certegy
Certegy has posted consistent earnings growth in recent years but this has been slowing. Growth has slowed to 1% in the first half of FY17 from 17% in FY14. Management attributed this to the re-negotiation of some contracts at lower margins, as well as a material drop-off in solar in March and April. The company has targeted sectors such as home renovation, medical and solar energy storage for growth in this product and brokers expect further detail at the investor briefing in June.
Deutsche Bank believes Certegy has developed a mature profile and this is why it is trading below expectations, acknowledging competition is also increasing. Citi is less certain about Certegy, as its analysis has revealed online competitors are being incrementally pulled in-store, and this is a potential risk for Certegy. AfterPay and Zipmoney are lower cost and easier to use offerings than Certegy. Moreover Oxipay, the company's competitive response to AfterPay, has not been launched yet, with a June 30 date still expected.
Macquarie believes a digital offering is key to getting the Certegy business back on track and also awaits more detail regarding the launch of Oxipay. Given the contribution of Certegy to group profitability and organic growth, this is an area the broker will watch closely. The company has made a succession of downgrades to earnings in several years of limited growth and the broker believes valuation alone is not enough for a re-rating.
Outlook
Citi also hopes the upcoming investor briefing will provide insight on FY17 and FY18 guidance. Moreover, the broker envisages the first half FY18 and result should show the company is moving to a key juncture in its Australian cards business, as a critical mass of customers enter the interest-bearing period. The Australian cards business has been singled out by the company as a strong performer, driven by improvements in the front-end customer experience.
The broker believes the company could benefit from focusing on its core business and this would entail divesting individual businesses or entire segments. Citi separates the bulls, where the focus is on the two solid credit card businesses, and the bears, that believe the company remains too complex and under competitive pressure. While both positions have merit, Citi is no longer in the bull camp and downgrades to Neutral from Buy.
The company has previously outlined a target to grow volumes in FY18 by 10-12% for NZ cards, 15% for Australian cards, 8-10% for Certegy, 10% for NZ leasing and 5-10% for Australian leasing. While there are a number in initiatives in place, UBS is cautious about the significant step up required to achieve these targets in FY18 and suspects double-digit growth in cash net profit in FY18 will be a stretch.
Valuation remains undemanding and earnings expectations have arguably been re-based but the broker observes organic growth is still an issue and there are risks around the potential hike in impairments, higher funding costs, margin compression and competition.
There are three Buy ratings and three Hold on FNArena's database. The consensus target is $2.48, suggesting 21.9% upside to the last share price. Targets range from $2.17 (UBS) to $2.73 (Morgans, yet to update on the new guidance).
See also, Going Tough But Growth Returns To FlexiGroup on February 23.
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