Big banks hold key to the fortunes of smaller players
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
Frequently Asked Questions about this Article…
A shift in the major banks' willingness to lend can rerate small wholesale lenders by unlocking cheaper, larger funding lines. Since 2008 many wholesale borrowers have simply maintained funding lines; if the big banks start lending more freely again, companies that rely on wholesale funding could expand lending books, boost profits and see their share prices re-rate.
FSA Group is a niche wholesale lender focused on factoring and residential mortgages and it also offers services such as debt agreements and personal insolvency. The company sources much of its funding from major banks, specifically Westpac (about $238 million) and Bendigo Bank (about $50 million), with a large portion of that non‑recourse funding secured through October 2015.
FSA's share price almost doubled over the past year supported by a significant buyback. The company earned $8.5 million after tax in 2012 and forecast 12–15% growth for 2013. With a market capitalisation near $65 million it was trading on a forecast price‑to‑earnings multiple of just over 7 times, and management expected to keep paying dividends — a yield in excess of 5% over the coming 12 months was considered quite possible.
The article notes that if major banks began to lend more to the group, FSA could increase the size of its loan book by about 25% without adding significant costs. That scenario was described as having the potential to push the stock much higher — the piece suggested the share price could easily move toward $1 a share.
Money3 is a Melbourne‑based niche lender specialising in car loans, leasing and small cash loans. For the half to December 31 it expected a pre‑tax profit of $2.1 million, up 40% on the prior corresponding period, and it reported a 70% lift in written business. Investors pushed the share price about 15% higher on the update.
Money3 has grown from small funders and retained profits, but a wholesale funding deal with a major bank is the next clear catalyst. If it secures bank funding — especially before June 30 — it could finance faster growth in its auto division and deliver stronger 2014 earnings. Without external bank funding, the company’s growth is likely to be more moderate.
Navitas reported a near miss on expected profit but investors reacted positively, citing improving student enrolments and a lower Australian dollar as drivers of earnings growth over the next two to three years. The stock was trading at about 22 times current‑year earnings and around 16 times earnings two years out; while Navitas delivers a very strong return on equity (close to 40%), the article cautions the stock may already be expensive relative to its growth prospects.
Primary Health Care delivered a robust first half and confirmed full‑year guidance of EBITDA between $370 million and $380 million. Its valuation was about 8.5 times current‑year EBITDA, cheaper than rival Sonic Healthcare at roughly 10 times EBITDA. The article suggests Primary is not expensive but may struggle to push through $5 a share unless earnings are upgraded; it remains an 'unloved' name that could run higher as more investors discover it.
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