Big banks hold key to the fortunes of smaller players
FSA Group
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
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 Sydney Morning Herald does not take responsibility for any stock recommendations.
matthewjkidman@gmail.com
Frequently Asked Questions about this Article…
The article explains that after years of tight credit since 2008, major banks are now 'flush with capital' and keen to lend. For niche wholesale lenders this can be a material catalyst: access to cheaper, larger wholesale funding from a major bank can let them grow loan books quickly without big cost increases, rerating their share price if growth and profits follow.
FSA sources bulk funding from Westpac ($238 million) and Bendigo Bank ($50 million) and has secured most of that non‑recourse funding through to October 2015. That stable funding base matters because it underpins FSA's lending capacity and its ability to grow the loan book if major banks lend more freely.
FSA nearly doubled its share price over the past year, supported by a major buyback. It earned $8.5 million after tax in 2012, forecast 12–15% growth in 2013, has a market capitalisation of about $65 million and trades on a forecast P/E just above seven times. Management targets dividends and a yield in excess of 5% is possible; if major banks increase funding, the loan book could grow ~25% and the stock could rerate significantly.
Money3 specialises in car loans, leasing and small cash loans. It reported a half‑year pre‑tax profit of $2.1 million (up 40% year on year) and lifted written business by 70% in the period. The next big catalyst would be a wholesale funding deal with a major bank — such funding would support faster growth in the auto division. Without it, growth is likely to be more moderate.
If Money3 hits a full‑year pre‑tax profit close to $5 million, the stock would trade on a forecast P/E of marginally more than 10 times. That valuation suggests investors are paying for continued earnings growth, and securing a bank funding line would be the main upside trigger to justify higher earnings expectations.
Navitas narrowly missed expected profit numbers but investors reacted positively, citing improving student enrolments and a lower Australian dollar as drivers of stronger earnings over the next two to three years. The stock is trading at about 22 times current‑year earnings and around 16 times earnings two years out, suggesting that it is already priced for significant growth despite delivering a strong return on equity (~40%).
Primary Health Care delivered a robust first‑half and confirmed full‑year EBITDA guidance of $370–$380 million. The company trades at about 8.5 times current‑year EBITDA, cheaper than peer Sonic Healthcare at roughly 10 times. While the stock has run strongly (about an 80% rise to $4.60), it may need earnings upgrades to push convincingly past $5 a share; it still has room to run as more investors notice it.
Key things to monitor are: announcements of wholesale funding deals with major banks (a clear catalyst for niche lenders like FSA and Money3), upcoming earnings upgrades or guidance changes, trends in customer demand (student enrolments for Navitas, patient volumes for Primary), currency movements (a lower Australian dollar can help Navitas), and valuation metrics (P/E and EBITDA multiples) to assess if growth is already priced in.
Call 1300 880 160
Start a chat
Schedule a call
