Small Caps | Feb 18 2020
Revenue and cash flow exceeded expectations in the first half as Money3 focuses solely on automotive credit.
-Profit guidance considered achievable, given a typically higher contribution in the second half
-Revenue lost through divestment of branches has been replaced via acquisitions
-Go Car Finance acquisition successfully executed
By Eva Brocklehurst
Money3 Corp ((MNY)) has revealed it made the right decision in re-positioning its business, as traditional bank lenders steer away from automotive finance. Both revenue and cash flow exceeded expectations in the first half, which brokers believe demonstrates strong underlying business traction and credit quality.
Around 15% of loan origination is now coming from near-prime borrowers, while average loan sizes have increased with expansion into the new car market. New car loans average around $40,000 versus $12,500 for used cars.
Net profit guidance of more than $30m in FY20 has been reiterated. Shaw and Partners considers the guidance conservative and highlights, although there has been a material structural change in earnings, the second half typically delivers a higher contribution to profit.
The strength of the first half result supports a modest upgrade to Canaccord Genuity's numbers as well. In the broker's view, a more efficient capital structure should mean net profit exceeds $40m next year if the current growth rates continue.
Guidance is considered very achievable and, beyond that, additional funding at a lower cost of debt should support medium-term aspirations, allowing the company to introduce additional products.
Meanwhile, the multiples remain undemanding and Canaccord Genuity retains a Buy rating and $3.20 target. Baillieu, which also has a Buy rating and target of $3.40, notes the strong growth trajectory and loan origination cited at the AGM in November has been sustained.
Loan origination in Australia totalled $109m and $29m was grossed in New Zealand. Through acquisitions and organic growth, the company has now replaced revenue lost through the divestment of branches and online lending operations in 2019.
The company expects to announce a return to traditional funding markets by the end of FY20, which Baillieu expects will deliver a benefit of more than 3% in average funding costs.
Originations are up 25% in Australia and the company is now solely focused on providing automotive credit. Canaccord Genuity agrees that, once Money3 secures a lower cost of funding and expands its products, the credit quality of the book will also improve.
Go Car Finance
Shaw and Partners notes the company now has a mandate to acquire and consolidate an attractive and fragmented sector that the major banks have under serviced. This is illustrated by the acquisition of Go Car Finance in New Zealand, where existing management was retained and within six months had delivered 60% book growth.