Cash to Crash Converters

Cash Converters suffered its biggest selloff in more than two years despite reassurances from management that earnings is set to recover in the December quarter.

Cash Converters (CCV) suffered its biggest selloff in more than two years despite reassurances from management that earnings is set to recover in the December quarter.

The stock plummeted 13.6% to its lowest point since November last year of 95 cents when Australia’s largest pawn shop chain warned that things have been tough since the introduction of the new Consumer Credit Legislation Amendment, which is designed to clean up the payday lending industry.

Lending criteria has also been tighten as part of the new regulatory regime and that has led to a drop in demand for personal loans and cash advances as borrows adjust to the new lending conditions.

What is perhaps more disconcerting is the change in accounting treatment for profits from its personal loans business. Principal repayments and interest income will now be booked in equal amounts over the life of the loan.

This will be a significant negative for Cash Converts, which used to recognise most of the interest revenue in the near-term with the principal repayment weighted to the back end of the loan term. Personal loans accounted for around 40% of group revenue in 2012-13.

This means analysts will be taking a razor to their forecast for the group as consensus estimates on Bloomberg is forecasting a 22% uplift in sales to $334 million in 2013-14, and another 15% increase the year after.

Further, its United Kingdom operations are impacted by the new anti-money laundering laws in that country as consumers adjust to stricter identification requirements.

There isn’t much good news from its car leasing business, Green Light Auto, either. Earnings before interest, tax, depreciation and amortisation (EBITDA) has fallen 32% to $14.2 million in the first quarter of the financial year compared with the previous quarter. Cash Converters owns an 80% stake in Green Light.

However, Cash Converters’ chief Peter Cumins said he is seeing “an improvement across the business in October” and is “confident that the September quarter was the low point in the regulatory transitionary period”.

The comments won’t be enough to calm investors, especially since news of a class action lawsuit in New South Wales has been dogging the stock.

Cash Converters is the worst performer on the Uncapped 100 on Thursday.

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