Shares in FlexiGroup (ASX:FXL) have surged over 20 per cent in the last month. This is leading to investors asking whether this is the real deal and can the share price continue to strengthen. We take a look at the company fundamentals and whether the charts indicate any further upside from here.
FlexiGroup is a diversified financial services group providing “no interest ever”, leasing, vendor finance programs, interest free and credit cards, lay‐by and other finance solutions. Their services cover four key markets: Business to Consumer, Business to Business, Retail to Consumers (and small business customers) and online. The Company has a network of over 20,000 merchant, vendor and retail partners. FlexiGroup operates in Australia, NZ and Ireland within a diverse range of industries. These include home improvement, solar energy, fitness, IT, electrical appliances, travel and trade equipment.
The Company operates a number of segments, including Cards (Australia and NZ), Certegy and Leasing (Australia and NZ).
The shares have undergone a substantial de-rating in its 1-year forward P/E multiple over the last 3-4 years. This has been amid generally underwhelming news flow (in particular a number of profit downgrades), management changes, mixed operational performance and a market perception that the business is too complex. With this in mind, the recent recovery in the share price is curious. There is an absence of any ASX announcements by the Company. There has also been a lack of broker updates since the 1H18 results.
Support for the FlexiGroup fundamentals
Flexigroup has for some time shown potential to generate strong profit growth. However, is the market now prepared to overlook the lack of execution to date? We note three areas of support for FXL’s fundamentals:
- The Australian Cards segment. Despite reporting strong volume growth over five consecutive halves to 1H18 that had not been matched by profit growth, it represents the largest potential for FlexiGroup to boost earnings. The Company have an aspirational target of ~$30m NPAT by the end of FY20. This represents significant growth from the forecast NPAT of ~$11-12m for the Australian Cards division in FY18. This rapid rate of growth is expected to be driven by a shift in the portfolio mix between interest free and interest bearing steadily moving towards more interest bearing. Although a key risk here is the pace of the transition, as the segment continues to attract new customers.
- Following a disappointing performance from the Consumer Leasing and Commercial Leasing businesses in Australia, FlexiGroup is now focussed on Consumer Leasing. FlexiGroup launched a new Consumer Lease product called “Lisa” at their 1H18 results with retailer Harvey Norman. While there are a number of factors that indicate Lisa could drive higher volumes, the product is likely to be lower margin.
- FlexiGroup expects annualised cost reductions of $5-10m (from FY19) from initiatives undertaken in 1H18. This included a reduction in headcount, renegotiation of multiple key supplier contracts and implementation of a new cost management platform. The Company stated that there was more cost savings to come. The previously stated target of $20m of annualised cost savings over FY18-20 is still in place.
Is FlexiGroup a buy?
Whilst we consider that any entry at current levels would be purely a medium-term value play (the shares are now trading on a 1-year forward P/E multiple of under 9x), we are mindful of the investment risks. The main risk being the Company’s track record of profit downgrades and mixed operational performance. A slower-than-expected ramp-up in the expected earnings growth for the Australian Cards segment unlikely to be well received by the market.
The chart for FlexiGroup
FlexiGroup shares have been trending lower for over 4 years now. If we draw a trendline on a weekly chart, you will notice that the recent rally in the shares has broken the downtrend line. However, this might only lead to a large basing pattern, not necessarily a new uptrend. Ideally we would want to see the shares push past the prior swing high near $2.50. Volume has also been fairly light during the last few months, indicating a lack of conviction. As FlexiGroup approaches resistance now, we expect the shares to start easing back again. Ultimately we need to keep an eye on whether they can push through $2.50, with their August results perhaps providing a possible catalyst.
Michael Gable is managing director of Fairmont Equities.
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