Cash Converters (CCV) announced its half year results Monday morning with lower profits. CCV had previously announced to the market in October its expected lower first half performance so this result, while disappointing, is not unexpected
Key highlights
- Revenues up 15.5% - with online in particular showing good growth
- EBITDA down 28.5% - with new costs to meet legislative changes hurting 1Q results
- 2Q showing improvement
- CCV retains strong relative value against other FIIG originated deals
The main driver of the disappointing result has been the introduction of new regulations and legislation in the Australian short term lending market. Meeting the requirements of these new regulations has driven an increase in costs (particularly in the first quarter) as CCV put systems in place to ensure they were compliant with the changes. At the same time, the new regulations increased the documentation requirements on CCVs customers, causing some drop off in loan volumes as customers became used to the new requirements.
The new legislation, in particular those aspects limiting the rates able to be charged and the costs associated with its implementation, have squeezed margins over the period. The positive of the legislation is that CCV, as the largest operator in this largely fragmented market, should be in the best position to amortise the costs across the broadest customer base – smaller operators may struggle, providing more opportunities for CCV.
The company has begun to see a turnaround in the second quarter including record breaking December lending performance for both the personal loan and cash advance products. Quarter on quarter revenue (2Q14 v 2Q13) was up 15.3%. The personal loan book (the most profitable financial product) grew 12% and online continued its strong growth with value of loans up 74% to $18.9m compared to the prior comparable period. As mentioned December was a record at $6.1m up 148% on the December 2012 monthly value of loans written. Online loans now represent 23% of the total loan book and importantly ~60% of the online customers represent new customers to the business.
The UK business continues to struggle with significant write-downs (previously identified) booked in the 1H14. Operational numbers for the UK are heading in the right direction (number and size of loans in both the cash advance and personal loan books increased for the period) however the struggling business continues to eat a significant amount of management time and resources as they seek to turn the business around. Most disappointingly the bad debt % in the UK increased to 12.1% from 11.5% during the period. Management expect this to gradually turn around as they become more familiar with the customer base and grow their return clientele volumes, however it remains an issue at this point.
Cash Converters’ fixed rate bonds are offering good relative value compared to other FIIG originated fixed rate issues with similar returns to the G8 Educations fixed bond, but maturing one year earlier, or offering around 50bps more than Silver Chef’s bond which has a similar maturity horizon.
All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.