Company Overview: FlexiGroup Limited (ASX: FXL) is engaged in the consumer revolving finance and cards, provides BNPL category of products, Commercial Lease and SME financing services and Consumer Leasing. It is a point of sale lease and rental finance for the IT equipment, electrical appliance, and other retail markets. FlexiGroup Limited is a diversified financial services group providing, both directly and through a network of over 73,000 retailers and brokers, no interest ever payment products, leasing, vendor finance programs, interest free finance, credit cards, and other financial solutions to consumers and businesses.

FXL Details

Decent Volume Growth and Fundamentals: FlexiGroup Limited (ASX: FXL) is engaged in the consumer revolving finance and cards, provides BNPL category of products, Commercial Lease and SME financing services and Consumer Leasing. As on 26 October 2020, the market capitalization of the company stood at ~$559.65 million. Despite the challenging market conditions due to the global health pandemic, the company continued to make great improvements against its new strategy and direction and reported decent fundamentals across the business. During FY20, FXL achieved decent volume growth of 17% in FY20 across its continuing products and added 524,000 customers, counting nearly 2.3 million customers across its range of products. In addition, the company increased its presence with over 73,000 sellers offering interest free instalments and SME finance. The increased presence of the company allowed FXL to deliver Cash Net Profit After Tax of $29.2 million.

During FY20, interest income of the company increased by 2% to $360.2 million. This was mainly due to an increase in BNPL, AU Cards, and NZ Cards, with growth in average receivables over the year. In the same time span, interest expense decreased by 11% on the prior year with lower funding costs, offsetting the increase in average borrowings because of portfolio growth. During the year, the company reported an increase of over 9x in transactions per annum across interest free products. However, other portfolio income was impacted by reduced fee income from restructuring BNPL to improve competitiveness, simplifying revolving credit, and the cessation of legacy products. While FY20 operating and other expenses were in line with FY19, the company reported cost savings of over $10 million on an annualized basis, which is inclusive of labor costs, process optimization, and renegotiation of supplier arrangements.

During the year, the company also launched bundll as a ‘Buy Now, Pay Later, Everywhere’ and saw a strong traction with humm in Australia, which benefited from the digital transformation undertaken in FY19. A decent foundation has been set for the company’s BNPL offerings as evidenced by growth in volume of 18%. The industry dynamics support the continued growth of BNPL with penetration among consumers in Australia to reach ~40% by mid-2021. The company seems on track to benefit from the upcoming growth opportunities.

FY20 Operational Highlights (Source: Company Reports)

Centralising Value Propositions around the humm™ Brand: The company has marked a simplification milestone to unify the proposition of interest free instalment payments for consumers and SMEs and has launched the humm™ brand with transactions of over $1,000 with strong and profitable customer growth. It is currently operating in Australia, New Zealand and Ireland and retains a market share of around 17.5% in Australia. During FY20, the company reported an increase of 172% in humm online transactions and continued to grow its customer base and distribution channels, including eCommerce and sales volume. The company is centralizing its value propositions around the humm™ brand to harness the natural synergies across its consumer and SME products.

Performance of humm (Source: Company Reports)

humm Launches in New Zealand: The company has recently launched humm in New Zealand as the only buy now pay later product in the country to support transactions in-store and online up to NZD10,000. humm seems ready to revolutionize the New Zealand market, with the larger spending power opening new segments such as solar, home furnishing, renovations, luxury retailing, fertility and healthcare to Kiwis using BNPL. The company has recently announced that the Australian Competition Tribunal has granted authorization for a new consumer code for retailers of 'new energy tech' products, differing from the previous conditions imposed by the ACCC with respect to "buy now pay later" finance providers. The new code sets minimum standards for consumer protection. 

Successful Completion of Retail Offer: The company has successfully completed the retail component of the 1 for 3.20 pro-rata accelerated non-renounceable entitlement offer and raised gross proceeds of ~$36 million at an offer price of $1.14 per share.

Dividend Update: During the year, the company declared a dividend of 3.85cps for the half year ended 31 December 2019, payment of which was deferred to October 2020. Given the current economic circumstances and the equity raising, the Board has decided not to pay a final FY20 dividend and the decision on future dividends will be provided at the 1H21 results announcement after assessing macroeconomic factors and capital management requirements for sustainable and profitable growth.

Dividend History (Source: Company Reports, Kalkine)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of FlexiGroup Limited. Abercrombie (Andrew J) is the largest shareholder in the company, with a percentage holding of 19.66%.  

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: During FY20, gross margin of the company witnessed a slight improvement on the previous year and stood at 76.2%, up from 75.5% in FY19. In the same time span, EBITDA margin of the company was 17.6% and net margin stood at 4.5%. During the year, Return on Equity of the company was 3.6% and reported a debt/equity ratio of 3.94x.

Key Margins (Source: Refinitiv, Thomson Reuters)

Key Risks: FlexiGroup Limited operates in highly competitive and rapidly changing sectors, which provide both opportunities and challenges. The company is susceptible to risks including shifts in the competitive environment, risks related to technology and investment, larger shifts in the economy or retail environment, and financial risks.

Outlook: Despite the significant macro headwinds experienced during the year, FY20 has been a transitional year for the company, with several key milestones achieved to position the business for the future. The company is focused on achieving its reach, target market and audience and is rebuilding focus on expansion into the growing market of equipment finance for SMEs. FXL is working on streamlining the origination process with instant credit decisions. The strong demand for BNPL during COVID-19 has reinforced the value of the product for consumers and highlights the importance of humm for all stakeholders.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company retains sound fundamentals and has witnessed accelerated momentum in its BNPL segment. It seems to be well-positioned for future growth across the business and is streamlining the originations process. As per ASX, the stock of FXL is currently trading below the average of its 52-week low and high price of $2.162 and $0.368, respectively, proffering a decent opportunity for accumulation. The stock of FXL gave a return of 52.90% in the past six months and a return of 6.34% in the last one month. On a technical front, the stock of FXL has a support level of ~$0.979 and a resistance level of ~$1.297. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and arrived at a target price of lower double-digit upside (in percentage terms). Considering the current trading levels, decent returns in the past six months, modest long-term outlook and increasing market share of humm, we recommend a ‘Buy’ rating on the stock at the current market price of $1.09, down by 3.54% on 26 October 2020.

FXL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer  

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.