Going Tough But Growth Returns To FlexiGroup

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Business & consumer credit company FlexiGroup is returning to growth after a year of transition but there are challenges to be surmounted to meet targets.

-Dividend reduced to support fast-growing cards book
-Ambitious targets previously set for FY18 not reiterated
-Further clarity to be provided at the annual investor briefing
 

By Eva Brocklehurst

Consumer credit business FlexiGroup ((FXL)) is returning to growth, although the outlook remains muted and several brokers believe the company must execute on targets to regain confidence.

2016 was a year of transition for the company, with some businesses being hived off and growth being re-established. There are some early successes evident in the first half, Deutsche Bank notes, with volumes in Certegy stabilising strongly.

The broker believes the reduction in the dividend is a rational move to support the fast-growing cards book. This will be a drag on capital, margins and returns through the growth phase but is expected to deliver a higher quality recurring earnings stream.

The broker believes the stock offers strong valuation support and the metrics do not require a lot of growth. The company has not reiterated its previous target of 10% growth in FY18, or divisional volume growth targets, but has committed to providing further information at its annual investor strategy briefing.

Deutsche Bank expects the volume growth targets will be either re-affirmed or upgraded, although cost investment and the earnings drag from the rapidly growing cards book are likely to make double-digit growth in FY18 a challenge.

Dividend Pay-out Reduced

The company has reduced its dividend pay-out target to 30-40% of cash net profit from 50-60%. The dividend reinvestment plan has been reactivated for the first half dividend. FlexiGroup expects FY17 cash net profit of $90-97m, and the realisation of $47.5m in the first half implies there is some room from the bottom end of the range, in Macquarie's view. The broker suggests the swing between the top and bottom end of guidance will depend on the timing of investments and level of expensing.

First half results were ahead of the broker's forecasts, overall, while the actual divisions were mixed. Although the company has taken a step in the right direction, following a succession of earnings downgrades and several years of little growth, Macquarie believes more is required for the stock to re-rate.

As a result, at this stage, the broker retains a Neutral rating. Relative to the broker's forecasts first half cash net profit for Certegy and Australian leasing were ahead, Australian and New Zealand cards in line, and New Zealand leasing below.

UBS observes the deal with Flight Centre ((FLT)) is delivering in its initial phase. The company believes there is potential to more than double the Australian card segment revenue/profitability over the next few years. The broker likes the positive steps taken to address organic growth concerns but believes more deals like this will be necessary to achieve ambitious targets for FY18, and offset the slower growth in Certegy/point of sale leasing.

Targets For FY18

The company has previously outlined targets for volume growth in FY18 of 10-12% in NZ cards, over 15% in Australian cards, 8-10% in Certegy, 10% in NZ leasing and 5-10% in Australian leasing. While there are some initiatives in place, UBS is cautious about the necessary lift in several of these divisions in FY18 in order to achieve the targets.

Overlaying this with risks around impairments, higher funding costs, margin compression and competition, the broker believes there is still a significant number of issues outstanding and retains a Neutral rating.

Morgans believes management has set a realistic base of the business and is implementing a number of meaningful growth strategies. The broker considers a return to growth into FY18 is readily achievable and supported by a material step-up in receivables in Australian cards, as well as early traction from the re-building of the commercial leasing team, stable Certegy earnings and growth potential in the new dental contract.

The fact the company did not reaffirm its previous targets that were set for FY18 does not, in the broker's view, signal a lack of confidence in the outlook. Rather, Morgans believes new management requires further assessment of the traction it is achieving in its growth initiatives. The broker does not believe looming funding pressure is material. Management expects a 20 basis point increase in the cost of funds in the short to medium term.

Citi sticks with its Buy rating but believes execution on targets is paramount. The broker suggests that while bulls will lean towards the two solid credit card businesses, the bears may believe the stock is still too complex and under incremental competitive pressure. While the broker believes the latter case has merit it remains in the bull camp.

Citi considers online competitors being incrementally pulled in-store potentially pose a risk for Certegy. The advantages of their competitive offerings include being lower cost and easier to use, while Certegy's strengths are in its larger transaction size, longer repayment periods and strong in-store relationships. The company has much to prove in FY17 but is positioning well, in the broker's view, to leverage its strengths. Citi also finds the fully franked yield appealing.

There are four Buy ratings on FNArena's database and two Hold. The consensus target is $2.57, suggesting 13.2% upside to the last share price. Targets range from $2.25 (UBS) to $2.75 (Citi).
 

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