FXL, which leases equipment to consumers and business, stock was up over 10% year to date before June 22^nd but following the exit news of chief Tarek Robbiati the stock is now down 1% YTD. Investors certainly didn’t like the news, which though understandable, will only have a short-term impact on the stock price, and soon we could expect the company to hit earlier levels.


Group Overview (Source - Company Reports)

Mr. Robbiati, since taking up the role in January 2013, helped FXL with its profits along with a string of acquisitions of finance and leasing companies. Though the exit definitely raises growth concern into financial year 2015-2016, the board is already in action with an internal and external search to find a suitable replacement. We expect, FXL to find a suitable replacement soon, who will continue with the impressive growth in years to come. What’s interesting to note here is, on the day the company announced the exit of Mr. Robbiati, it also reaffirmed its cash net profit forecast for 2014/15 of $90-91 million. By this, the management wants to send out the signal to the stakeholders that the exit of Mr. Robbiati won’t impact the operations.


Financial Highlights (Source - Company Reports)


First half of the financial year has been strong for FXL with five divisions of the groups including business and individual equipment rental, lay-by plans and credit card finance, witnessing a growth in profits for the first time in over two years. FXL is determined to accelerate the growth in the second half of the financial year. For the same, it is investing to come up with products that meet the taste of this new generating, who prefer to pay with their smartphone. Such a shift in customers demand is seen as a major change in Australia's $50 billion consumer payments industry.


NZ Leasing Source - Company Reports)

For the first half of the year, FXL increased its net profit $34.6 million to of $38.5 million. The increase in the profit was primarily due to a 9% rise in the volumes to $587 million and a 10% gain in the receivables to $1.35 billion. FXL’s New Zealand division witnessed the biggest jump in the profits of 23% to $3.2 million, with Certegy emerging as the biggest earner. The growth in New Zealand was mainly the result of Equico business purchase, organic growth also played its part.


Cost to income ratio (Source - Company Reports)

For FXL, upside is also expected following the government’s initiatives to push small business purchases, towards the end of the year. FXL, which also finance big retailers' interest-free repayment offers to customers, is poised well to benefit from this initiative as the firm is high on the consumer confidence due to its Rent-Try-Buy product and SmartWay Leasing system.


Flexigroup daily chart (Source - Thomson Reuters)

Further, its dividend yield of over 5%, provides another good reason to pick this stock. Apart from this, FXL has been consistently growing its revenue streams and improving cash flows. For the first half of the 2015, the company reported an impressive 8% rise in the EPS while interim dividend jumped 9%, along with a robust forward outlook. The robust performance can be majorly attributed to the company’s Interest Free Cards and No Interest Ever business groups.

Over the past few years, FXL has increased its focus on the digital finance opportunity, and the management is confident that the company is on track to dominate digital finance in Australia and New Zealand. While preparing for the cashless future, the company is eyeing expansion in the flourishing electronic wallet technology.

Over the years, FXL has been making efforts to push its growth by taking support of the New Zealand economy. For the 1H15, the company’s New Zealand Leasing division reported a 23% rise in the cash net profit after tax (NPAT). In March, FXL revealed that following the acquisition of market leader Telecom Rentals for $NZ106 million, it would become the biggest IT leasing company in New Zealand. The acquisition is expected to contribute around $3 million to NPAT in 2016 financial year. The full-year NPAT for 2015 is expected to rise by 7.6%. Previous to this deal, FXL made its first New Zealand acquisition, buying technology leasing group Equico for an undisclosed amount.

To diversify its retail partners, over the past few years, FXL acquired numerous businesses such as Harvey Norman and Dick Smith. Also, the company has expanded its roots into business equipment leasing, mobile broadband and online payments. Its recent acquisitions RentSmart and Once and Lombard retail credit cards are already contributing to the top line. It’s not just stopping here, it has considered numerous other takeover targets like GE Capital's consumer finance business, and probably company Fisher & Paykal's finance arm.


FXL is currently trading at a PE of 14.6, which is well below the competitors and the industry average of around 20. This along with a yield of over 5% is one of the highest in the industry. The consumer segment for the group is back to profitability, cost of funds are also on a decline and its receivables gained more than 10% in the first half of 2015, all these factors and more (such as potential acquisitions, robust growth in NZ, etc.), position FXL well to expand its growth in the second half of 2015 and beyond. Also, the recent decline in the stock price following the exit news of Mr. Robbiati, provides a good buying opportunity to the investors.

Based on the above the reasoning, we recommend FXL as a BUY at the current price of $2.97.

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