This is a diversified financial services group that provides point-of-sale interest free, no interest ever leasing, vendor programs, interest-free cards and other payment services to consumers as well as businesses. It was founded in 1968 to lease office equipment to businesses. It is a leading provider of retail point of sale finance to businesses as well as consumers and offers a wide range of services as described above. It floated an IPO in 2006 and currently has a market capitalisation of around $ 1 billion. Its distribution platform consists of 700,000 finance customers, more than 12,000 active retailers and $ 1.35 billion in receivables. The distribution network operates across many industries including relationships with the likes of JB Hi-Fi, Dick Smith and IKEA. The management team is talented and the high-performance culture has led to awards such as Australia and New Zealand Best Employers from AON Hewitt,
Company Structure (Source - Company Reports)
The balance sheet shows strong capitalisation with spare capacity and return on equity of 23%. Funding sources are diversified and the group enjoys committed facilities from Australian and international financial institutions to support is growth. The risk profile is solid with an award-winning credit appraisal system and with 20 years of experience in consumer and business credit built into the scoring systems. The company has significant experience in acquisitions with the successful completion of transactions the latest being Telecom Rental of New Zealand in March 2015. The group follows a conservative approach to acquisitions and targets businesses which are high-volume and accretive.
Cost to income ratio (Source - Company Reports)
Group business structure
No Interest Ever which has been trading in 1989 was acquired in October 2008 and offers interest-free and cheque guarantee products to diverse industries. It helps to increase sales volume for retailers because no interest is payable by the customer. The business has $ 475 million in receivables and the average term is 27 months. The interest-free Cards Business has been trading since 2002 and was acquired in June 2012. It operates as an interest-free point of sale card finance company and offers retail partners an interest-free product customers being cross sold a Visa card which can then be used for subsequent purchases. Once Credit was acquired in May 2013. The key metrics include $ 218 million in receivables with an average term of 18 months. The Consumer and SME Leasing business Flexirent has been trading since 1988 with an IPO in December 2006 and offers lease and mobile broadband. Customers get to pay affordable monthly payments. RentSmart was acquired in January 2014 to expand distribution to include JB Hi-Fi and Dick Smith. Key metrics are receivables of $ 317 million with an average term of 36 months. New Zealand Leasing is in the business of leasing computers to the commercial and business use sector and reserves margins for the retailer. Equico was acquired in March 2014 to expand business to include education and government sectors. Enterprise Leasing recruited an experienced OEM/vendor leasing team in 2009 increased volumes for OEMs and vendors. Customers are provided with an affordable tax deductible means of acquiring and managing assets. Think Office Technology was acquired in March 2014 for its expertise in managed print, IT and office solutions. The key metrics are receivables of $ 262 million with an average term of 60 months.
Financial Highlights (Source - Company Reports)
First half 2015 results and highlights
9% growth in volume and 10% in receivables generated a cash NPAT of $ 42.5 million a growth of 9% over the previous year. Volume of $ 587 million represented a growth of 9% over the previous year and receivables at $ 1.34 billion a growth of 10%. Cash earnings per share grew by 8% to 13.5 cents per share and the interim dividend fully franked was up by 9% to 8.75 cents per share. The key points were the continued transformation of the pool of profits with all business segments contributing higher earnings compared to the previous year. The Consumer and SME Leasing business showed a positive cash NPAT for the first time since FY 2011. The group is becoming digital and this has resulted in material improvements in service and repeat business value across the entire group. The group has reconfirmed cash NPAT for FY 2015 of $ 90 million-$ 91 million and the dividend is expected to remain at between 50% and 60% of cash NPAT . The fully franked dividend yield is currently around 5%.
NPAT Growth (Source - Company Reports)
Other points to note were the 9% growth in net portfolio over the previous year, the reduction in funding costs as a percentage of borrowings as a result of diversifying the funding sources, and the control of impairment losses as a result of the proprietary credit scoring capabilities and the improved utilisation of collection technology as a result of which impairment/ANR was 3% compared to 2.8% in the previous year. The group strategy remains to play where the banks don't and to invest in digital technology to scale up business and take advantage of the digital finance opportunity.
Performance by segment
The key financial highlights of the No Interest Ever segment were NPAT growth of 10% driven by the 7% growth in receivables using a highly scalable platform. Sales volumes continue to be stable at $ 15 million per month in an environment of low government subsidy. VIP/Repeat business accounts for 75% of the growth in volume and the NPS growth is at an all-time high of +50. The business continues to strategically expand is new EZI-Pay Edge product in New Zealand and the success of the VIP program highlights the value provided to merchants and retailers and provides a basis for further leverage. There is increased penetration among existing partners and industries and a continued focus on expansion in areas such as health care, solar power storage and home renovations. There will be a further expansion of direct to consumer marketing as well as an increased focus on expanding the paperless mobile application program.
FXL Daily Chart (Source - Company Reports)
Interest Free Cards saw a 10% NPAT growth on the back of a 22% volume growth and a 12% growth in total receivables. The growth in receivables will see a steady stream of future income as interest-free receivables revolve into interest bearing receivables. New business volumes are up $ 21 million or 22% over the previous year and total active accounts have increased by 22%. The combined cards business using a single platform for origination and processing means that it is easier for dealers to do business and approval times in stores are below 20 min. Product innovation has been accelerated with the launch of two new card products. The introduction of mobile payments is generating additional card activation and usage.
Consumer and SME Leasing showed strong results from the high yield consumer business the first half and cash NPAT was up by 3% because of a 2% volume growth and 5% receivables growth. The 13% growth in the Consumer business was due to the refreshed product line as well as increased penetration across all channels. The 13% decline in the SME business can be attributed to lower business confidence. The growth outlook for Consumer continues to be promising with improved product offerings across all retailers and the launch of an online applications portal. In the SME sector, rate cards have been refined and risk-based pricing has been introduced for greater competitiveness. Growth should continue in the education sector and opportunities exist in areas such as energy beauty and digital media.
Performance for the group as a whole was a 9% increase in NPAT over the previous year driven by 18% growth in receivables and lower funding costs resulting in an increase of $ 15 million in operating income. The cost to income ratio has declined from 40.6% in the previous year to 40.3% because of continued control on costs and investments. The cost of funds has also benefited from a securitisation program and the improved terms of funding. The diversified structure of funding continues to generate lower funding costs and investments in technology and synergies from acquisitions should continue to benefit the cost to income ratio. Impairment levels should continue to be stable by leveraging the new platform for collections.
Investors seem to have taken the departure of the Managing Director and consequently there was a fall in the share price in the aftermath of the announcement. However, we believe that this is an overreaction particularly because the group has confirmed that it is on track to meet its earnings guidance for FY 2015. In the first place, dividends have been growing and the current dividend yield in excess of 5% is attractive in the low rate environment. The growth of the company has been achieved while maintaining the high return on equity. The earnings base is diversified because of the number of products offered and the acquisition of Telecom Rental NZ will further strengthen this position. The company is also making significant progress in transforming itself into a digital finance company. We believe that the stock is cheap and the current price and would recommend a Buy at the current price of $2.57.
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