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High-flying financial group can take bull by the horns

22 Nov 2012 SYDNEY MORNING HERALD - MATTHEW KIDMAN



We have written about FlexiGroup in a positive fashion several times this year. Unfortunately I gave up the ghost back at $3.50 a share. Meanwhile, shares in the consumer finance group have motored to $3.90 in the past 12 months. The company is now trading on a hefty price-earnings multiple (P/E) of about 14.5 times 2013 earnings and would seem fully valued.

FlexiGroup has been tremendously active in generating earnings growth through the creation of new business divisions and by acquisitions. Many investors fear the best is behind the group, especially with the departure of American chief executive John DeLano. The new boss, Tarek Robbiati, is a former Telstra operative and will take the reins in the new calendar year.

If rumour is correct Robbiati might have his hands full from day one. An opportunity exists for FlexiGroup to buy Fisher & Paykel Appliances' finance division. The New Zealand-based group was recently taken over by its Chinese manufacturing partner Haier.

Haier is now looking to offload the highly profitable retail finance division. This would make a perfect fit with FlexiGroup, which could garner synergies from cheaper funding and reduced overhead.

The Fisher & Paykel finance business generated earnings before interest and tax of $37 million last year and is expected to be sold for about $250 million.

Although FlexiGroup has a strong balance sheet, an acquisition of this size would prove a great time to raise fresh equity and take advantage of a strong share price. No doubt such a move would be well supported by institutional shareholders. It could also be an opportunity to enter the stock. It will be interesting to see if the rumours are true.

Reece Australia

THE Victorian-based Wilson family would have to be a contender for the lowest-profile billionaires in Australia. Despite running a successful public company, the board and management of the bathroom and plumbing products group rarely utter a word in public, or to investors, or analysts for that matter.

This level of anonymity should not deter investors from taking a hard look at the company.

Like all housing-related stocks, Reece earnings and share price have struggled to perform since 2008. But the stock stuck its head up to record a 12-month rolling high recently, despite the company saying September quarter sales were down 3 per cent and earnings down 4 to 6 per cent on the previous corresponding period. Activity has seemingly picked up and the company may see sales flat for the half, which is a nice comeback.

For Reece's stock price to power higher it must start to get a better return from its 440 outlets. Reece has spent about $130 million on capital expenditure over the past two years but its net profit is virtually the same as four years ago. The group also continues to accumulate cash, with about $160 million sitting on the balance sheet. All this adds up to the return on equity falling from the mid-20s to the high teens.

A pick-up in new housing and renovation markets could see the group's returns improve in 2013. If Reece can produce the same returns as 2007 then net profit would rise by 35 per cent, putting it on a P/E multiple of 12.5 times and closer to 11 times once the cash is deducted from the value.

Primary Health Care

ANOTHER stock that has featured heavily in our prognostications this year has been pathology and radiology outfit Primary Health. Run by the enigmatic Dr Edmund Bateman, its share price has powered 51 per cent higher after hitting a low in early June.

Next week at its annual meeting the company should give an update on how it is tracking on its 2013 earnings guidance of 20 to 25 per cent per share growth.

In recent weeks there have been some positive signs for shareholders. First, finance director Andrew Duff decided to top up his shareholding. Duff is conservative by nature and a highly reliable operator. Second, the pathology industry was able to strike a deal with the federal government this week on pathology item rebates that was in line with market expectations.

If Primary can deliver its earnings forecast it is trading on 2013 P/E of just under 14 times and 12 times 2014. This means it could easily trade towards $4.50, about 12 per cent higher than today's level.

matthewjkidman@gmail.com

Fairfax Media does not take responsibility for any stock tips.