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FXL VIDEO



 

Stock Of The Day - Flexigroup (BUY)

Flexigroup is in the spotlight for today given the completion of acquisition of Telecom Rentals Limited (TRL) from Spark New Zealand Limited. As highlighted earlier, the acquisition included TRL’s leasing receivables of about NZ $97m and the total enterprise value has been indicated to be about NZ $106m including the net tangible assets of about NZ $92m and NZ $14.5m goodwill. This deal would help FXL to expand the business footprint in NZ. This is as per the strategy to have low risk but high return capital allocation seems to fit the momentous growth profile for FXL. The Company has evaluated that TRL acquisition would be cash EPS accretive next year and will likely generate FY16 cash NPAT of $3m. FXL’s book size is also likely to double in NZ and provides for consolidation in the SME and consumer finance space.


Financial Results (Source – Company Reports)

The Company has reported good earnings’ impetus across the Consumer leasing, interest free cards and Certegy owing to the business integration and customer centricity concentrated on digitization, as per the 1H15 results. The Consumer and SME leasing segment illustrated positive cash net profit after tax over prior corresponding period (pcp). As per FXL, all the segments reported higher earnings over pcp. Primarily, the cash net profit after tax surged by 9% and the fully franked dividend also rose by 9% to $8.75 cents per share. There has been a 13% rise in consumer volume growth which came out as an encouraging highlight while a lot of negativity prevailed in recent years. Refreshed product and better penetration across all channels led to this rise. However, there was a 7% dip in volumes in Enterprise while the SME fell 13%. Traction was witnessed for the interest free cards business and 22% growth in active customers was noted. Certegy also reported 9% growth in 1H15 volume while the cash net profit after tax rose 10%. There was stability noted for the solar volumes at about $15m/month.

The FY15 cash NPAT guidance of $90m-$91m has been reaffirmed by the Company and the dividends have been indicated to be within 50-60% of cash NPAT. This is likable to be achieved given there is no rise in bad debts.


 
Impairment Losses and Cash NPAT (Source – Company Reports)

We also see good cost management. However, some hiccups may be witnessed owing to lower funding rates. On the other hand, the Company’s strategic investment program entails 10 projects in 1H15. Some of these are indicative of digitisation of the business thereby giving an edge to compete in an online and mobile retail market.


Interest Free Cards (Source – Company Reports)

The drags that can impact the performance include non-performing loans, rise in impairments, poor receivables growth and any residual lease risk. At the same time, risks such as regulatory risks and operational/management risk may hinder growth. Then, we also note that a material contract exists between TRL and the NZ Ministry of Education with regards to the supply and lease of laptops to NZ schools. This raises a re-contracting risk for FXL going forward.


Cash Flow Bridge (Source – Company Reports)

As per the trading scenario, price to earnings ratio for FXL is around 17 with a yield of 5% whereas the sector average is around 23. However, the return on equity and return on assets have been better than the sector average. The overall appealing portfolio full of finance solutions, strong client relationship base, organic growth backed by direct-to-consumer leasing through online applications, efforts to diffuse through small-to-medium enterprise market and so forth speak for FXL’s potential.


FXL Daily Chart (Source - Thomson Reuters)

Based on the foregoing, we reinstate a BUY recommendation for this stock at the current price of $3.36.