Cash Converters International
Recommendation
The share price of Cash Converters has increased six fold since reaching a low of $0.22 in November 2008, and almost 150% over the past year. On 31 August 2011 the share price initially dropped 40% after its largest shareholder, Nasdaq-listed Ezcorp, pulled an offer to take a 53% controlling stake after the Australian Federal Government announced it wanted to introduce strict caps on fees and charges for micro-lenders. The watered down rules take affect from 1 July 2013 with higher loan volumes expected to more than compensate for any minor impact on Cash Converters’ profitability.
Though the Australian micro-finance market is mature, the company should increase market share as smaller players exit the market. The company is also growing rapidly in the UK by expanding its store base and loan book. Bad debts of 5% are currently consistent with the Australian experience in the same phase of development, but this needs to be managed carefully over time. Margins are expected to increase as more customers from Ol’ Blighty develop a credit history, and the company is ramping up its online lending service and developing new financial products.
The company currently trades on a forecast price-to-earnings ratio of around 15 and pays a 2.9% fully franked dividend yield. Though earnings could increase quickly if the company’s international expansion is successful, we’re prepared to wait for a larger margin of safety given the risks of lending to less creditworthy borrowers. AVOID.