Financial Grime 30 August 2018

Aug 30, 2018 / Financial Grime

Executive Pay

  • There was talk yesterday of the rise in shareholder rebellion to executive pay in the 2018 AGM season.  A scan of the public register for the financial companies  at risk of shareholders putting them in the naughty trough reveals the following:
  1. CMC Markets – 21.97% voted against the new remuneration policy
  2. Nex Group      - 40.2% voted against the remuneration report
  3. Lloyds Bank -20.8% voted against the remuneration report
  4. Direct Line – 23.4% voted against the remuneration report
  5. Old Mutual Plc – 28.6% voted against the remuneration report and 22.7% voted against the ESOP
  6. Jupiter Fund Management – 20.3% voted against the 2018 LTIP
  7. Impax  – 22.8% voted against the increase in max. rem. limit for Directors
  • View Jupiter does appear to be an unusual LTIP plan where for a company with £221m of cash on the balance sheet the CEO can earn up to £1.6m a year from an LTIP with two equally weighted performance measures of EPS growth and investment outperformance.  The concern is that companies with strong balance sheets incentivised on EPS growth leverage are liable to increase leverage and cut costs until risking the business. I would suggest Provident Financial is a good example. We may well expect Jupiter to become acquisitive. A word search shows the word acquisition appears 13 times in the 2016 annual report and 17 times in the 2017 annual report.

Morses Club – H1 trading update

Share Price 154p

Mkt Cap £200m

  • Statement The business continues to perform well which is in line with expectations.  Credit issued increased 4.3%, down from the exceptional 25% last year while impairments are well under control and within the guided range of 22%-27%.  Customer numbers are flat over H1 at 229k while the loan book has grown 6.1%.  Morses Club Card is now held by 27k customers, up 28% from 21k in February while Dot Dot Loans continues to develop.
  • Estimates Our February 2019 estimates assume a £76m net loan book, which compares to c £72.8m at the Feb 18 year end, from a higher number of customers with smaller average loan sizes. We make no change to our estimates but note that the customer numbers are lower and the average balance higher evidencing the company’s relentless focus on customer quality rather than quantity. We expect to introduce a 2021 forecast on results on October 4th.
  • Valuation On our estimates we expect the company to deliver a c 25% ROAE in the year to February 2019 while it trades at a modest 2.9X average equity. This translates to a modest 11.3X Feb 19 PER falling to 10.3X while providing a 4.9% yield rising to 5,5%. Ahead of further detail on results on 4 October we leave our modest price target unchanged.
  • Conclusion The company has a strong track record of delivering high quality growth which we expect to result over time in a premium rating.  Having navigated strong territory builds successfully and profitably last year we expect the emphasis to return to new products moving forward. As the company proves it has multiple growth strategies that it can successfully deliver at high returns we are confident this company will become rated as high quality growth

     

  • Amigo Holdings – Q1 Results 

    Share Price 280p

    Mkt Cap £1.33m

  • Results The loan book is up 37% year on year to £638m from customer numbers up 39% year on year. Revenue grew 47% to £62.9m while impairments grew from 14% of revenue to 25% of revenue resulting in a 31% increase in PBT to £12.3m. EPS was up 31% to 5.5p. The outlook refers to significant growth potential. The £18.5m of deferred broker costs in the balance sheet seem to be a fair accounting treatment given the 3 year term of the loans. Debt is £460m from a negative eauity of £30m on the balance sheet while shareholder loans were £207m although these results are at 30 June and the IPO was completed on 4 July.
  • Estimates Given revenue in Q2 was 27% of the full year revenue estimate of £235m and the growth rate is fast full year estimates look very conservative
  • Valuation In PER terms the shares trade at 13.9X Dec 18 with an modest yield of 1.5%. ROE is expected to be 41% and the company trades at 5.8X book valueView  This company looks to be very strong and reasonably valued as a market leader in the guarantor loans space. The criticism that they are overcharging for low credit risk appears to be rebutted by the impairment rate of 25% of revenue, which is close to that of high quality home collected credit operators
  • IFG Group – H1 Results 

    Share Price 158p

    Mkt Cap £167m

  • Results  Revenue is up 12% largely on account of the interest rate rise in November 2017. Operating profit of £1.4m but adjusted pre exceptional profit is up 54% to £5.7m. which equates to 4.24p of EPS.  Current strategy review update will be communicated in H2 2018 and cost reductions of £1m are announced. No further update on the Elysian Fuels issue and an update on the James Hay legacy review will be provided with the full year results.
  • Valuation James Hay turned over £26m with a 20% operating margin.  This could be worth maybe £100m without the legacy issues which are significant.  Saunderson House turned over £17m with a 21% operating margin.  This must be worth 3-4X annualised revenue. Lets say £100-£120m. This does exclude £2.7m of group costs which may reduce the valuation although there is also tangible assets of £50m on the balance sheet.  It therefore seems the business should be worth in excess of £200m which is 20% ahead of the current share price.
  • View  When these legacy issues are resolved there is significant upside. The next 6 months will be key to unlocking the value and depends on the successful outcome of the legacy issues.