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Big banks hold key to the fortunes of smaller players

7 Feb 2013 THE AGE - MATTHEW KIDMAN



WE SHOULD always be looking for a catalyst that works to rerate a stock's value. A change in the attitude of the major banks to lend more freely could act as a catalyst for a handful of listed companies. Since 2008, wholesale borrowers have simply tried to stay alive by keeping funding lines in place. Now the major banks, flush with capital, are keen to lend again.

FSA Group (FSA)

FSA is a niche wholesale lender operating primarily in factoring and residential mortgages. It also provides services such as debt agreements and personal insolvency. The company sources its funds from Westpac ($238 million) and Bendigo Bank ($50 million) and on-lends to companies and individuals. FSA has secured the bulk of this non-recourse funding through to October 2015.

FSA's share price has almost doubled in the past year, supported by a major buyback program. The company earned $8.5 million after tax in 2012 and has forecast 12 to 15 per cent growth in 2013. With a market capitalisation of $65 million it is trading on a forecast price to earnings multiple of just over seven times. FSA also wants to keep paying dividends and a yield in excess of 5 per cent in the coming 12 months is quite possible.

The blue sky for the stock is the desire of the major banks to lend more money to the group. If this eventuated, FSA could increase the size of its loan book by 25 per cent without having to add significant costs. The stock could easily jump towards $1 a share.

Money3 (MNY)

MELBOURNE-based Money3 is another niche lender that could benefit greatly from better access to wholesale funding. The group specialises in car loans, leasing and small cash loans. Money3 said this week it would post a profit before tax of $2.1 million for the half to December 31, up 40 per cent on the previous corresponding period. The company said it had lifted written business by 70 per cent in the period. The news was warmly received, investors kicking the share price 15 per cent higher.

In recent times it has been able to post a stronger second-half result and is on track for a full-year pre-tax profit of close to $5 million. If it can hit this number it is trading on a forecast PE ratio of marginally more than 10 times.

The next catalyst for the stock would be a wholesale funding deal with a major bank. Until now, Money3 has built its business from small funders and profits. It said at last year's annual meeting it hoped to secure funding from a bank to help finance growth in its auto division, but nothing has yet been signed. If it happens before June 30, then 2014 earnings will be strong. If no external funding arrives, growth will be more moderate.

Results season

TWO stocks we recommended last year that have announced half-yearly results are education group Navitas and medical services outfit Primary Health Care.

Despite a near miss on expected profit numbers, investors have responded favourably to Navitas' result, believing improving student enrolments and a lower Australia dollar will deliver strong earnings growth over the next two to three years. The stock is becoming expensive even on the most optimistic numbers. On current-year earnings, investors are buying the company at 22 times and for earnings two years down the track they are paying 16 times. Navitas is a tremendous business that delivers a return on equity of close to 40 per cent but there might be better value elsewhere. That does not mean the stock will collapse, but it may struggle to outperform.

Similarly, Primary Health Care has had a momentous run since the middle of last year with the share price up close to 80 per cent to $4.60. The company delivered a robust first-half result and confirmed its guidance of earnings before interest, tax and depreciation of $370 million to $380 million for the full year.

This values the company on an EBITDA multiple of 8.5 times current year earnings, still cheaper than its nearest rival Sonic Healthcare, which trades closer to 10 times EBITDA. This means the stock is not expensive but unless earnings are upgraded in the coming months it is hard to see the stock price punching through $5 a share. Primary is an unloved name and has the ability to run higher as more people discover it, but easy gains may be behind us.

The Age does not take responsibility for any stock recommendations.

matthewjkidman@gmail.com