Company Overview - FlexiGroup Limited is engaged in the provision of lease and rental financing services; no interest ever loans, and interest free cards. The Company is a diversified financial services company providing vendor finance programs, interest free and Visa/Mastercards, managed print services, lay-by and other payment solutions to consumers and businesses. It operates through five segments: No Interest Ever business (Certegy), Interest Free Cards business (Lombard and Once Credit), Australia Leasing (consisting of FlexiRent, SmartWay, FlexiWay, FlexiCommercial, Enterprise and Think Office Technology), New Zealand (NZ) Leasing, and New Zealand Cards (Fisher & Paykel Finance). Through its network of over 20,000 merchant, vendor and retail partners, the Company has access to approximately four markets, such as Business to Consumer, Business to Business, Retail to Consumers (and small business customers) and online. It operates in Australia, New Zealand and Ireland.
 

FXL Details
 
Delivered performance as per expectations for fiscal year of 2016: FlexiGroup Limited (ASX: FXL) reported an 8% growth in the Cash NPAT of $97.0 million in FY 16 driven by the 19% growth in the volume and 47% growth in the closing receivables. This is in line with updated guidance provided in May 2016 by the company. Moreover, Cash NPAT growth is also due to the diversification, organic growth, successful acquisitions and implementation of funding strategies to reduce costs. On the other hand, FXL has posted a 39% fall in the statutory net profit after tax of $50.2 million by incorporating the non-cash and one-off adjustments, including the deal and integration costs from the FXL’s acquisition of Fisher & Paykel Finance (FPF), and impairments and provisioning from discontinued operations. In addition, FXL’s new business volume for FY 16 was $1,350 million, which is up 19% on the prior year and the closing receivables grew 47% to $2,094 million. This is the first time the closing receivables crossed the $2 billion mark in the FXL’s history. Therefore, there is a strong portfolio income growth of 16% to $396.4 million as compared to the corresponding levels in FY 15. The group also reported a 4% fall in ROE to 19% and a 2% fall in the cash earnings per share to 28 cents. The ROE and Cash EPS in FY16 are impacted by the timing lag between the capital raised in November 2015 (22% of issued share capital) and FPF acquisition completed in March 2016. However, the re-shaping of the profit pool from leasing to cards would let to ROE fall while enhance the earnings sustainability.
 

Financial Performance highlights for fiscal year of 2016 (Source: Company Reports)
 
Agreement with Flight Centre Travel Group Limited: FXL intends to drive the organic growth across its core business units, and even signed a significant new agreement with Flight Centre Travel Group to offer interest free finance to approved customers across Australia. This would be provided through the wholly owned subsidiary, Lombard Finance Pty Limited on the travel purchases across the retail travel brands, Flight Centre, Travel Associates, Cruiseabout, Student Flights and Escape Travel. Additionally, the agreement is expected to generate significant additional volumes for FXL and has the potential to more than double the group’s card business’ revenue and profitability over the next several years. To initiate the program and start the operations, FXL intends to make an investment of around $3 million in FY17. In addition, the agreement with flight center would enable the group to leverage flight’s powerful distribution partners wherein the group’s customers would be able to book and travel as well as make use of extending their repayments over a long term interest free period which is a unique and beneficial payment option, leading to a rise in volumes for FXL. Meanwhile, the group even entered the New Zealand cards market through the strategic acquisition of Fisher & Paykel Finance. The integration is on track and business is performing as expected which could further drive growth and synergies. 
 

Segment Overview (Source: Company Reports)
 
Expanding offerings: FXL has launched Oxipay product in the market to increase the relationships with significant number of merchants. Moreover, the group alsoimplemented the Oracle cloud general ledger platform. The move to cloud based technology solutions would enable a reduction in ongoing capex spend. The increased rigor is being applied to capex prioritization. On the other hand, the group is also exiting non-core businessesand recycling capital out of discontinued non-core businesses while redeploying capital for the profitable organic growth. In this regard, TOT sale process is progressing well, FXL has divested the Paymate and Blink and Enterprise portfolio is in run-down. Meanwhile, the group is also expanding their geographic penetration and accordingly identifyingopportunities to expand in Ireland. FXL is constantly investing in the business to capture the significant market opportunity.
 
Commercial finance offer: FXL is rebuilding the Commercial finance business and gaining traction in AU market. In this value proposition and sales processes, several new introducer agreements are signed while Kikka cross sell to existing customers has started. On the other side, the group has built a strong and stable relationship with six Australian institutions which offer the revolving committed facilities. FXL has further diversified the additional funding through the acquisition of debenture program in NZ Cards. Overall the funding rate is increased which is slightly driven by an increased mix of funding in NZ (higher swap rates) in addition to higher cost of unused limit fees on Corporate Debt facility. Moreover, FXL has substantial unused committed revolving facilities to fund the growth in the foreseeable future. In addition, FXL has completed a $260m Certegy securitization issuance in April 2016.
 

Securitization supports cost of funds improvements (Source: Company Reports)
 
Sales team partner alignment: The group is reworking the product redesign to match the demographic changes in technology and ownership models by focusing on the channel partner relationships. Moreover, the sales team are being expanded to cover Flight Centre store network. Additionally, FXL has added new merchant partners since the last six months to its 20,000 strong store network, while the sales and marketing culture has been reinvigorated and the rapidly growing new business pipeline are in place, particularly across the commercial and cards businesses. FXL has taken an equity interest in Kikka Capital, a fintech small business lender, and the offering is being rolled out to the group’s established customer base.
 
Aiming a double-digit Cash NPAT growth in FY18:FXL’s strong channel partner relationships, digital origination capabilities, proven credit algorithms and diversified funding sources will provide FXL with a deep competitive advantage in high volume, small ticket transactions. In addition, this combined with one million strong business and consumer customer base, will provide consistent profit and returns. Additionally, FXL has reaffirmed its ambition for double-digit NPAT growth in FY18. Meanwhile, the group forecasts the Cash NPAT to be between $90 million - $97 million for fiscal year of 2017, after targeted growth investments. These investments are in-line with the strategy and focused on delivering the improved returns on invested capital, which includes growing Ireland, Commercial leasing and Oxipay. 
 

Outlook for Double-digit Cash NPAT growth (Source: Company Reports)
 
Stock Performance: The shares of FXL have fallen over22.4% in this year to date (as of October 14, 2016), as the group witnessed heavy impairment costs which led to bottom line pressure. The group’s dividend payout is at 56% of Cash NPAT for fiscal year of 2016. Moreover, the dividend per share is lower from FY15 due to the shares issued as part of capital raise in November 2015 (22% of issued share capital). On the other hand, the stock recovered by 16.2% in the last three months driven by their strategic partnerships with firms like flight center coupled with positive long term outlook, expanding penetration efforts. Despite this stock rise, the stock looks cheap which is trading at a decent dividend yield and a reasonable P/E. Accordingly, we believe that investors can still leverage the current stock levels to enter the stock. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $2.26

FXL Daily Chart (Source: Thomson Reuters)

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