CML Group has provided a trading update and earnings guidance in line with expectations
While CML’s credit metrics are marginal this is as expected, with the transaction structured to provide various protections to investors. Namely bondholders benefit from a first claim over the qualifying receivables, credit enhancements, overcollateralisation, debtor insurance and the fact the receivables are short term and the book can be turned to cash quickly for any liquidity needs. The bonds appear attractive for these reasons as well as the improved performance and near doubling of the receivables book in the past 12 months. The 2021 fixed rate bond is indicatively offered with a yield to par call of 7.53% (wholesale only) and the 2020 floating rate bond is indicatively offered at 7.17% (wholesale and retail).
Performance summary and forecast
CML Group (CML) has provided a trading update and earnings guidance for the full year ending 30 June 2016, based on unaudited management accounts for the nine months ended 31 March 2016.
CML’s accounts are summarised below including the half year to December 2015 and FY16 figures based upon company guidance.
| $Am | FY14 | FY15 | 1H16 | FY16f |
| Restated revenue* | 79.7 | 85.7 | 43.81 | 84.0 |
| Underlying EBITDA | 2.47 | 2.27 | 2.42 | 5.0 |
| NPAT | 1.13 | 0.01 | 0.53 | 1.0 |
| Cash | 0.50 | 14.14 | 11.00 | Na |
| Total debt | 9.23 | 35.01 | 33.76 | Na |
| Total equity | 10.26 | 9.9 | 10.43 | Na |
| Underlying EBITDA / Interest | 3.7x | 0.6x | 1.4x | 1.4x |
| Net debt/Underlying EBITDA | 3.5x | 9.2x | 9.4x | Na |
| Tangible Assets/Total Debt | 2.8x | 1.6x | 1.9x | Na |
Source: Company accounts
*CML changed accounting policy post FY15 and therefore revenue in 1H16 is incomparable to prior periods. The change was due to differing ways CML and its acquisition CFA recorded revenue. Previously CML reported revenue as total invoices funded plus associated fees. The group will now report revenue as just the fees earned. This is purely an accounting difference and cashflows do not change
- CML is performing as expected and confirmed its FY16 EBITDA expectations of $5m or a 128% increase compared to FY15. Revenue is expected to be relatively stable at $84m in FY16 compared to $85.7m in FY15 with the EBITDA improvement driven by the absence of one off costs such as a worker’s compensation claim, loss of margin due to a delay in renewing a labour agreement, CFA acquisition costs, restructuring costs and a $900k provision which were recorded in FY15
- Looking further ahead into FY17, the group states it 'expects that invoices purchased will be in excess of $500m, up 54% on FY16 and ‘expects to at least maintain gross profit margin on the expanded debtor loan book.’ This means CML seems relatively confident of another strong growth year in FY17
- Within the FY17 outlook, CML also stated that it continues to ‘seek out and negotiate with invoice financing providers to drive further acquisitive growth in its debtor loan book’, meaning the potential for further acquisitions
- The main risks to CML are from fraud and execution risks arising from its acquisitive led growth, noting CML state that Cashflow Advantage Pty Ltd which was acquired on 24 March 2016 has been fully integrated with the existing Finance operations
- While leverage (net debt/EBITDA) is high at 9.4x in 1H16 and interest coverage marginal at a forecast 1.4x in FY16, bondholders are primarily protected by the first claim over the qualifying receivables and the structural features of the transaction
- The business has limited fixed assets and will continue to benefit from economies of scale as the receivables book grown
Receivables book
As illustrated below, the group continue to grow the receivables book which stood at $53.4m at the end of March. The book was impacted by the usual seasonality effects at the start of the year and has resumed growing organically. Invoices purchased over the 9 months to 31 March 2016 totalled $234.3m, up 274% over the previous corresponding period.
Relative value
CML noteholders are in a senior position secured primarily against the receivables portfolio. The portfolio is covered by an insurance policy with an AA- rated insurer covering losses greater than $5,000. As such, recovery in the event of a default is expected to be high.
The notes appear attractive compared to its peers primarily due to the senior secured position (compared to the second ranking position behind other financiers in the case of Moneytech and Axsess Today) as well as the improved performance and near doubling of the receivables book in the past 12 months.
The notes are indicatively offered with the following yields to the par call date:
2021 fixed rate bond: 7.53% (wholesale only)
2020 floating rate bond: 7.17% (wholesale and retail)
Available with a minimum face value of AUD10,000 and a minimum total upfront spend of AUD50,000