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

Significant new funding facility:  FlexiGroup Limited (ASX: FXL) has completed a new $550 million funding facility with a major US bank with extensive global operations. The Group has been able to secure this funding based on its scale, reputation, compliance record, and the facility has been put in place to fund both the existing portfolio of FlexiGroup’s Australian Cards business as well as providing for the continued growth in the business. The new facility was a major step for the Group as it had been secured on significantly improved terms than existing facilities as well as allowing for lower capital support levels and replace existing funding facilities for the Australian Cards portfolio.


Flexigroup at a glance; (Source: Company reports)
 
Investing in Australian Cards division while witnessing stable growth in Commercial Leasing: 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 digitized to improve customer experience and reduce costs. The new arrangements will improve returns for Australian Cards business and allow for future growth in line with its strategy to double the Cards portfolio over the next three years. While delivered an exceptional growth of around 60% in Australian Cards in FY17, FlexiGroup is focusing to build a $1 billion business over the next three years. The Australian Equipment Finance Market has shown consistent year on year growth in receivables, positioning FlexiCommercial for growth. The commercial equipment finance market is over $36b per annum or $90b in receivables and growing year on year. Further, the market continues to move away from dealing directly with their incumbent bank.
 

Net Receivables by Product ($bn); (Source: Company reports)

FlexiCommercial is positioned for sustained growth: 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 specializing 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 standardization 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 specialized 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.


Flexicommercial loan book by industry type; (Source: Company reports)
 
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.


FXL is well placed with limited impacts; (Source: Company reports)
 
Significant boost 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 with $90b in receivables, growing year on year.
 

Scale with a measured approach to risk; (Source: Company reports)

Addressing Certegy’s operational challenges: 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)
 
Scope for growth in New Zealand 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 Centers, 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 maximizes 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)

The stock has declined 16.6% over the last six months as on 07 August 2017, while it is down 11% in the past one year, owing to subdued performance in Certegy and inferior guidance for FY17. However, we believe that the anticipated benefits from new product launches and ongoing initiatives to control costs will aid in improving performance going forward. We give a “Buy” recommendation on the stock at the current market price of $1.885
 

FXL Daily chart; (Source: Thomson Reuters)
 

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