Company Profile – Flexigroup limited is a financial services group providing, leasing, vendor finance programs, visa cards, mobile broadband, lay by and another payment solutions to consumers and businesses. Through its network of 11,000 merchants, vendors and retail partners the company has access to four markets which includes business to consumer, business to business, retail to consumers (and small business customers) and online. The company operates in Australia, New Zealand and Ireland within a range of industries including home improvement, solar energy, fitness, information technology, electrical appliance, navigation systems, trade equipment and point of sale systems. Services are offered through four business units: Certegy (no interest ever and lay by), Flexirent (lease), Flexi Commercial (Vendor Leasing Programs) and Lombard (credit card and interest free).

Analysis – FXL reported FY 13  Net Profit after Tax up 18% to $72 Million, ahead of management’s $68 – 71 Million guidance range. The 14% like for like receivable growth achieved was predominantly driven by Lombard (+52%), Certegy (+18%) and Flexi Commercial (+27%). Also the solar downturn turned out to be less severe than it was expected with FXL seeing volumes stabilise at $15 Million a month. VIP product within Certegy achieving 32% repeat business which is very encouraging. This also bodes well for FXL’s ability to cross sell products across the customer database whish stand s at 1.4 Million. FXL has launched a new app for Certegy customers, the first step in better managing client relationships. Further development of the app could see retail partners offered the chance to promote directly to customers enhancing FXL’s position as an intermediary.

Non solar volumes within Certegy are expected to post double digit growth in FY2014. Integration of Once Credit and Lombard is on track, with targeted synergies reaffirmed. The business has new management and an improved product and is now in a position to focus on card penetration and cross sell, which should underpin volume expectations. FXL outlined key areas of focus for the cards business, with segments such as furniture and home/hardware continuing to do well and new areas being targeted such as travel and education.

The Flexirent leasing business, FXL’s oldest and most profitable division is seeing a strong uptake  of Apple products at Harvey Norman, which is generating significantly higher transaction values than competing electronic brands. Flexirent is continuing to push in the SME space, which is expected to overtake the consumer category as the largest component of volumes and receivables. Mobile opportunity could be significant for FXL. FXL outlined a new product aimed at bundling mobile handsets with data plans, offering consumers an annual phone upgrade and alleviating acquisition costs for telcos. The product is at an early stage but sounds promising and pushes FXL into a large new market that is suited to a Flexirent lease and replace type offer.
The Certegy business is facing a major head wind from the unwind of government rebates that have supported the industry for a number of years. 1^St half of 2013 was a big period for solar volumes reflecting the rush of sales brought forward before some of the rebates expired. 2^nd half of 2013 was hence weak with volumes down 31% on 1^st half of 2013.
 
FXL has provided FY14 Net Profit After Tax guidance up about 17-19% which implies NPAT pf more than $80 Million. We believe that most of the growth would come from the Certegy business, Flexi Commercial and Lombard as well  as the efficiencies gained from the call centre off shoring initiative. Flexirent wrote $216 Million of volume in the year which is down 9% and Net Profit After Tax fell 4% to $33.1 Million. This was a solid result considering that the IT market fell significantly further in the period. The company has successfully diversified this business into the non-retail segments such as trade and catering equipment, servers and networks, with these volumes now accounting for 44 %.

Certegy was once again the star performer with a 13% volume growth taking it up to $490 Million and 18% receivable growth to $422 Million. Key contributors were solar and the retail and the home owner sectors. The absence of government subsidies for solar panels was missed in the second half of 2013 with new volumes falling by $37 Million VS first half.

FXL (AUD, Millions)	2013	2012	2011	2010	2009
Total Revenue	284.1	246.2	223.0	204.2	184.5
Total Operating Expense	189.1	163.7	153.2	147.8	137.3
Net Income After Taxes	65.8	59.0	51.8	58.9	32.8

By acquiring Thinksmart FXL has taken out a direct competitor in the point of sale leasing and interest free market. The business is currently loss making, however FXL expects to achieve pre-tax synergies of $4-$5Million post integration costs of $3-$4 Million. Thinksmart’s rentsmart product has more than43,000 customers and originated $11 Million in the 11 months to November at an average transaction value of $1400. The fido interest free product which was launched in 2012 also generated $11 Million over that servicing 9000 customers.

Footrpint of thinksmart in terms of number of stores:-

FXL	2013	2012	2011	2010	2009
Profitability
EBITDA Margin	62.0%	60.5%	57.5%	55.4%	54.2%
Operating Margin	33.5%	33.5%	31.3%	27.6%	25.6%
Earning Power
Pre-tax ROA	7.3%	8.1%	8.1%	7.3%	6.9%
ROE	20.7%	23.4%	23.6%	36.3%	30.1%
Liquidity
Quick Ratio	1.32	1.07	1.25	1.35	1.18
Current Ratio	1.32	1.08	1.25	1.35	1.19

Some of the positives that we have identified are as follows: - Continued market share gains in FXL’s core segment of consumer point of sale finance, an expansion of FXL’s reach in to the commercial and SME funding as well as the broader consumer finance market. Broadening its access to funding is key competitive advantage, further acquisitions which add new products and capabilities and development of new products that have large potential markets such as paymate. We will be putting a BUY recommendation on FXL at the current price of $4.05.

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