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Has FlexiGroup Reset A Realistic Base?

Australia | Aug 31 2016

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Finance provider business FlexiGroup has affirmed its growth targets as it undergoes a re-balancing of its business mix.

-Flight Centre contract drives upgrade to transaction volume guidance
-Expansion in Ireland flagged due to lack of POS consumer finance products
-Return to material growth in Certegy not considered likely in the near term


By Eva Brocklehurst

Finance provider FlexiGroup ((FXL)) has affirmed its growth targets as it undergoes a re-balancing of its business mix. Brokers note the outlook for FY17 has been re-based and appears more realistic. Offsetting stronger growth some headwinds remain apparent, including the cost of funds and increased impairments as well as volume growth in Certegy and continued pressure on the profitability of consumer leasing.

Citi observes the bull case for the stock is summed up with two solid credit card businesses, while the bears probably believe the company is too complex and further rationalisation is needed. While in the bull camp the broker acknowledges that the first half of FY17 will be critical.

The contract won with Flight Centre ((FLT)) is the driver of the company's upgrade to its volume guidance and Citi estimates FlexiGroup only needs to capture 0.2% market share of this $7bn in Australian non-corporate transaction value to meet the increase in guidance. The company believes the Flight Centre contract has potential to double cards profitability over the medium term.

Impairments have increased to 3.5% from 3.1% because of higher Certegy and Point Of Sale (POS) leasing losses but this should stabilise in FY17, Citi observes. While there is much the company is expected to deliver in FY17 the broker looks on the positive side and retains a Buy rating.

The affirmation of volume growth targets is encouraging for Deutsche Bank. Despite a lack of detail, the broker believes these targets are achievable and the stock's metrics do not require much growth to be justified. The company has also reiterated a target for 10% growth in FY18 but flagged further unquantified growth investments.

Morgans believes management has set a realistic base for the business and the opportunities in cards, commercial leasing and in Ireland are expected to offset areas of earnings pressure. Costs of $6m are factored in for developing and marketing Oxipay and expanding into Ireland. Management believes the market in Ireland represents a $15m net profit opportunity over the medium to longer term.

The move into Ireland is a recent decision, as the company has been in that market for eight years with Harvey Norman ((HVN)) but FlexiGroup believes there is an opportunity to expand given the lack of POS consumer finance products. Morgans is increasingly confident in the FY17/18 forecasts and upgrades its rating to Add from Hold.

The recovery in the share price suggests to Credit Suisse the business is at a cross-roads where the market prices the stock as "broken" but then the subsequent delivery on expectations or outlook indicates otherwise. This situation was instigated by the winning of a material contract with Flight Centre, in the broker's view, revealing that FlexiGroup's distribution network and track record are enough to drive new business.

The broker concedes the company is not without its challenges but guidance for $99-106m in underlying net profit for FY17 appears realistic and a path to future growth can be envisaged. An additional $9m in costs is estimated for growth-related plans, resulting in cash profit guidance of $90-97m.

Credit Suisse does not expect major downside for Certegy but, based on a deteriorating trajectory and unproven new product, a return to material growth is not considered likely in the near term. On the other hand, the Australian card business is stepping up and, with Flight Centre volumes to come on line, has a strong future, the broker maintains.

Macquarie still needs to be convinced. New business volumes were up 19% and closing receivables of $2.09bn were slightly ahead of Macquarie's estimates. Countering this, net underlying impairment losses have increased, most notably in Certegy and POS leasing. Macquarie notes the intention to return to double digit profit growth in FY18 but questions what is the right base for the business. The broker is not comfortable using the underlying FY17 profit estimates ($99-106m) as a base, as it expects the company to continue to invest in new business to support growth.

While appreciating the stock could appear good value in an increasingly expensive small cap market, and there are some early positive signs of a return to growth in the commercial segment, the broker expects it will take longer to arrive there in the case of Certegy and POS leasing. Hence, Macquarie considers it too early to get excited about the outlook and retains a Neutral rating.

FNArena's database shows four Buy ratings and one Hold (Macquarie). The consensus target is $2.61, suggesting 3.2% upside to the last share price. Targets range from $2.29 (Macquarie) to $2.70 (Deutsche Bank, Credit Suisse, Morgans). The dividend yield on FY17 and FY18 forecasts is 5.8% and 6.3% respectively.

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