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

To double the receivables book over the next 18-24 months:  FlexiCommercial's four key segments include, the SME Direct business, Broker business, Branded/White label business, and the managed services business. The groups SME Direct business is a dedicated function specialising in providing sellers with financial solutions for business requirements. Over the last one year, the company focused on replacing largely manual legacy processes with the introduction of greater process standardisation and automation. Further, operationally it has reduced processing costs, increased processing efficiency and delivered initiatives aimed at improving the customer experience. From a Sales perspective, the company has worked to tightly focus its efforts on yield and credit quality rather than volumes, while deepening connections with sellers and buyers. Moreover, as buyers are increasingly using brokers, FXL has developed a dedicated and specialised Broker team and rebuilding its proposition. Strategically Broker Business is also focused on book quality and yield rather than seeking to compete on price for volume. Overall, the company is working closely through broker groups with collective write of more than $5b per year and expects contestable share of this market to be more than $200m per year.


Net Receivables by Product ($bn); (Source: Company reports)
 
One of key differentiators in the market has been company’s successful program of branded / white labelled commercial finance solutions. Further, FXL has improved its asset and operating risk frameworks and resourcing. From a Trans-Tasman perspective, it has been working closely with NZ Commercial Business and assisted them in the development of strategic offering for their local market. Managed services product is experiencing substantial interest due to its unique features and have signed a relationship agreement with a global IT manufacturer and have strong interest from a large global reseller. Importantly. the solution is acknowledged in the industry to be superior to other market offerings due to quantity flexibility. Increasing focus on XaaS “Everything as a Service”, mirroring developments in the U.S as managed services offering strategically positions it to capitalise as first movers in the market as strategic partners are a seeing extensive interest from Tier 1 Australian and Global corporates.


FlexiCommercial to increase market share in SME and Micro; (Source: Company reports)

Australian Cards is a major growth story: FXL is witnessing exceptional and continuing growth across all key metrics with a clear path from transaction volume to revenue to profit. Further, successful initiatives are expected to drive initial take up and repeat usage with positive results on volume and percentage of book bearing interest continuing strongly. Notably, product offering being simplified with brand consolidation as its front & back end systems being digitised to improve customer experience and reduce costs.


Australian Cards is a major growth story; (Source: Company reports)

Significant (3x) lift in end of term upgrade rates: On Consumer leasing front volumes are holding firm through product reinvigoration with significant (3x) lift in end of term upgrade rates and actively engaging with key partners and market segments to target categories where lease has a product advantage for growth. Existing sellers are being retained with greater value addition, predominantly around the data. Further, regulatory environment being proactively and cooperatively managed to make necessary changes and no significant costs expected to impact its costs or volumes anticipated from compliance.  Notably, the Australian equipment finance market has shown consistent year on year growth in receivables and positioning FlexiCommercial for growth as the commercial equipment finance market is over $36b per annum or $90b in receivables and growing year on year.


3x lift in end of term upgrade rates; (Source: Company reports)

Rebuilding in progress: Currently, Certegy’s market is mid to high value transactions at medium to longer terms as 2/3rd of amounts financed are between $800 and $8000. However, as values/terms go up, core competencies such as credit decisioning, funding, regulatory compliance and collections come into play and create barriers to entry. Accordingly, the company is identifying and addressing Certegy’s operational challenges, so that can take advantage of these core competencies to defend its existing market share and enter new ones.


Certegy book analysis; (Source: Company reports)
 
Oxipay is a new market segment for FXL: Oxypay is largely a new market segment for FXL (sub $1000) and it is an entry level product in Australian consumer strategy with an ability to upsell and cross sell as part of an integrated product suite. It is an open loop product and could effectively available in any retailer anywhere in the world. Further, front-end has been entirely updated to be fast, easy and convenient for buyers and sellers. Importantly popular carts are integrated for online transactions and nearly a dozen integration partnerships have been established to perform instore POS. However, Oxipay will not focus on small ticket, high risk retail segments with a significant pipeline in other sectors.


FXL ‘s platform integration to create a unique offering; (Source: Company reports)

Scope for growth with leading market position: New Zealand is providing a great platform for growth as the economy continues to grow strongly with GDP growth of 2.7% and personal lending market grew by 4.9% on the back of retail sales increasing by 6.7% over the previous years. Importantly, the company has strong adoption with nearly half a million cardholders (17.9% of market) and over 13,000 retail partners with Q card in 25% of stores. Further, the company is building strong synergy across cards and New Zealand leasing to grow revenue and reduce cost. FXL is driving product innovation including with open loop lending with MasterCard and Flight Centres, aiming to be in 50% of NZ households with a $1bn book in 3 years. Recently, on 19th June, Flexifi Ireland launched with 5 sellers and the platform is entirely cloud based and maximises process automation to increase speed and reduce cost. Additionally, FXL is working closely with NZ cards on product, platforms and business intelligence.


New Zealand business summary; (Source: Company reports)
 
H1FY17 driven by revenue from cards segment: During H1FY17, the company’s revenue grew by 33% year on year (yoy) to $235.5m with 15% yoy increase in net income to a $47.7m, led by NZ Cards and Australia cards segment. But, net income was partially offset by increase in employment expenses of 35% to $43.7m. The group has re-affirmed its guidance of cash net profit to $90-93m (down 2%) for FY17 from $90-97m earlier forecast, largely due to the underperformance of Certegy and impacted by ~$3m investment in Flight Centre partnership. However, Australian cards, which constitute 52% of group receivables and 39% of group cash net profit, continued to deliver robust growth while Certegy (No Interest Ever business), is behind expectations. Going forward, company expects interest free / interest bearing mix to normalize towards historical average driving revenue growth from significantly increased receivables. Notably, the company expects underlying trading in Q4FY17 to be robust and key initiatives include the launch of Oxipay and the project in Ireland going live. Moreover, the dividend policy has been rebased to provide additional capital to support organic growth opportunities within Cards and Commercial leasing. On the other hand, Renaissance Smaller Companies Pty Ltd became a substantial holder of FXL with 5.27% interest.


H1FY17 financial results summary; (Source: Company reports)

The stock has declined 26% over the last three months as on 26 June 2017 and currently trading close to its 52 week low levels, owing to subdued performance in Certegy and lower guidance for FY17. However, we believe that the ongoing initiatives to control costs and anticipated benefits from new product launches will aid going forward, and give a “Buy” recommendation on the stock at the current price of $ 1.69



FXL Daily chart; (Source: Thomson Reuters)
 

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