Tuesday 29 August 2017 by Asmita Kulkarni Company updates

CML Group - FY17 solid result

CML posted a strong result with FY17 EBITDA of $13.3m which was ahead of revised guidance as both scale and volume improved. Management are focused on transforming funding by moving to majority bank funded debt in the next 12 to 24 months. CML’s bonds are currently trading higher than the 104% call price at which they are likely to be redeemed at the next call date in May 2018, we believe they offer fair value at current price

Key highlights for FY17

  • CML reported strong FY17 unaudited EBITDA of $13.3m, including acquired entities and discontinued operations, compared to $5.5m reported in FY16. FY17 actual EBITDA was ahead of our forecast due to cost controls and improved economies of scale
  • Revenue increased by 48% to $40.0m in FY17 as invoices purchased grew by 146% to $1,001m and the loan book grew by 11% to $77.3m following the successful integration in 1H17 of the two acquisitions which were completed in 2016
  • Gross margin declined following the acquisitions but improved in 2H17. We expect margins to continue improving over the medium term as the company continues to review and reprice business
  • Earnings were supported by strong growth in both scale and margins. Since CML has a limited fixed asset base any growth in business volume has a direct impact on improving economies of scale and EBITDA margins, as demonstrated in 2H17
  • Higher than expected client attrition rate following integration of the new businesses was offset by growth in new sales, attributable to hiring of a new and highly experienced sales team, as well as repricing and promotion of additional services. CML also actively managed out clients who did not meet its risk criteria
  • As at June 2017, CML had over 360 clients in 13 industries with average client tenure greater than four years
  • In July 2017, CML launched a new Equipment Finance product which will help diversify the business and bring in new customers, though impact from this business line is unlikely to be material in FY18
  • CML has advised that the 20 day volume weighted average price (VWAP) of its shares has exceeded the minimum threshold of $0.35 required for early conversion by the company as per the terms of the Convertible Notes. Consequently CML has the right to convert all or some of the Convertible Notes to fully paid ordinary shares at any time the company wishes. If CML converts all the Notes, the reduction in annualised interest cost will be $936,000. The company has not yet announced its intention to convert the Notes
  • CML once again reiterated that over the next 12 to 24 months the company wishes to transition from its current funding arrangements to majority institutional bank funding. CML has established a banking relationship with ANZ and put in place a new $40m wholesale banking facility in 2017. Bank funding will help reduce CML’s cost of funds from the current blended rate of 8.9% to around 5% - 6% and also reduce exposure to unutilised funds

Source: Qantas, FIIG Securities

Relative value

The following chart details the trading margins on a yield to worst basis of peer high yield finance companies.

Source: FIIG Securities

CML intends to refinance its bonds in order to lower its cost of funding, however the exact timing is uncertain. Furthermore, bank financing would be attractive given the bond terms restrict dividend payments greater than 50% of NPAT. We note that CML has structured its bonds with coinciding call dates suggesting strong consideration of redemption earlier than maturity. CML can call its issues at first opportunity in May 2018 at 104%. We believe the CML bonds offer fair value at current price though they are not as attractive as the Cash Converters and to a lesser extent Axsesstoday bonds. 

​Prices accurate as of 24 August 2017 but subject to change; indicative only
Sources: Bloomberg, FIIG Securities 

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