Company overview
The company is entering a new stage of development, profitability and growth and is using its financial strength, resources and cash generation to make the business better diversified and stronger. It is looking to attain higher levels of productivity, efficiency and performance as the positive impact of the IT investment programme is felt. The Presidian acquisition is on track and well advanced and the focus will be on delivering synergies in revenues and costs. Organic growth in GRS is ongoing and there is potential to increase penetration along the total customer base and focus will be sophisticated concentrating on winning new and large customers. The approach in competitive asset management will be disciplined and emphasised profitable cross selling opportunities. The UK is a strong base for structural growth and the constructive regulatory framework will see it attain profitability in 2015. The company continues its policy of capital allocation in a disciplined and accretive manner making acquisitions that complement its core competencies, provide distinct and significant synergies and bolster the existing organic growth.
The business model
Group remuneration services focuses on salary packaging administration and novated leases concentrating on hospitals, health and charity workers and public and private sector lease programs. It has over 1000 customers who in turn employ around 1 million employees. Revenues are generated by annual administration fees and transaction fees on leases and there are growth opportunities in lease penetration in the private sector.
MMS Business Model (source - company Reports)
Asset management includes fleet management, operating leases and finance leases catering to a mainly corporate customer base. There is a balanced stream of revenues as well as a stream of management fees along with NIM and in-life services. Profits accrue on sale and there are RV risks on the balance sheet. The company has access to competitive cost of funds and the Maxxia Finance UK finance assets are managed by a joint venture.
Retail financial services include finance, warranty and insurance offerings catering to a base of retail customers using dealer, broker and retail networks. The finance and insurance business is responsible for origination of around $ 450 million in loans and works on volume-based incentives and finance commissions. The warranty business generates brokerage fees and earnings from claim administration.
First half FY 2015
The following are the key points for the half year. NPAT of $ 31.1 million is 62% higher than the same period of the previous year and 5% higher than the same period of FY 2013. The major impact on the results came from a reduction in novated leasing because of the temporary suspension of a contract. Despite the general economic conditions, business performance continues to be satisfactory and growth in the Group Remuneration Services segment was strong and profitable with improvements in operating margins. Assets under finance and management continued to record growth and the UK business is building up satisfactory momentum. The productivity improvements resulting from IT investments continue and significant contract wins and a strong line of new business augur well for future growth. The Presidian acquisition was completed on 27 February 2015.
EPS & Dividend (source - Company Reports)
The Presitian acquisition
The integration of the acquisition is at an advanced stage and well on track. The acquisition will be immediately accretive to earnings because it complements the core competencies and provides a good fit both strategically and culturally. The growth prospects are striking because the second hand car market is estimated to be 3 1/2 times larger than the new car market. The focus will be on achieving and delivering revenue and cost synergies across the entire group. In addition, there is plenty of scope to improve finance terms as well as terms with suppliers because of the size of the combined book which is in excess of $ 1 billion. The full benefit will be felt in FY 2016 and there will be plenty of opportunities for cross selling among product groups as well as customers. Accounting, risk, legal and administrative staff have been relocated to the Melbourne office and there is reason to be pleased with the initial performance of the business.
Among the highlights of Presitian, the following points are noteworthy. The financial profits are attractive because margins are robust both at the gross margin and the EBITDA levels and there are multiple revenue sources from finance, insurance and warranty products. It has a substantial distribution network consisting of over 2500 teachers supported by 60 brokers and 14 Money Now retail branches and the distribution network is an entry barrier for competitors because it is difficult to replicate. The market is fragmented with few players of any reasonable scale and Presitian is the number one player in the used car warranty market. The IT platform is proprietary and custom-designed and the depth of the expertise of the management team is high quality. Growth opportunities will be created by the rollout of integrated product offerings and leveraging data and systems.
The UK market opportunity
The annual new car finance for both business and consumer amounts to about GBP 20 billion annually and the financial sector in the UK is now recovering from the financial crisis. Borrowing is still a challenge in some sectors but competition overall is increasing. The market is fragmented with lots of players participating but the fleet market is gradually consolidating. There is very little product innovation or differentiation between the various players. There are an estimated 4.9 million private-sector businesses and the approximately GBP 18 billion annually of non-car asset finance are distributed as follows
UK Market Opportunity (Source: Company Reports)
We believe that the company is now poised for further profitable growth because the Presitian acquisition will contribute substantially to future growth and profitability. GRS is performing well with increased participation rates and a much more sophisticated approach to winning new and large customers. Investment will continue in advance of the growth curve to ensure the optimum efficiency and performance. The company will continue to look for new acquisitions which will be complimentary and accretive and add value. The strategy is well formulated and implementation continues to be disciplined and controlled. We put a BUY recommendation at the current price of $13.23.
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 currently hold positions in: BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
Copyright
Copyright © 2014 Kalkine Pty Ltd ABN 34 154 808 312. No part of this website, or its content, may be reproduced in any form without the prior consent of Kalkine Pty Ltd.
Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.