FSA Group: Interim result 2018
Recommendation
Good news for FSA Group this half could be a bad sign for the general economy. After several years of lacklustre growth, the company's Services division saw a 12% increase in clients, with revenue up 7%.
Key Points
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Services clients up
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Record loan pools
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Rising interest rates a tailwind
FSA's Services division is one of Australia's few genuinely counter-cyclical businesses. FSA arranges Part IX Debt Agreements between clients and lenders to settle debts or to freeze repayments until they're more financially secure.
As we've explained previously, FSA is like a canoe salesman in the Sahara. When the sun shines and the economy is growing, fewer people are in financial distress, leaving FSA without clients. But when it rains, customers come flooding through the doors. People in financial distress have only a few options: the main ones being bankruptcy, a debt agreement, or refinancing their debt. FSA is the largest provider of all three solutions.
This half's 12% increase in clients – and a 16% jump in debt agreement administrations for the overall market – suggests an increasing number of Australians are in financial trouble. It's too early to tell whether this is the first symptom of a larger economic slowdown, but it's a worrying sign.
Record consumer debt
Given the uptick in bankruptcy clients, it's little surprise that the company's Consumer Lending division, which writes sub-prime loans, also had an excellent year. Revenue rose 22% to $9.2m, buoyed by a 20% increase in home loans and a 40% increase in personal loans. Pre-tax profits for the division leapt 35% and now account for 40% of the total.
Half-year to 31 Dec | 2017 | 2016 | /(–) (%) |
---|---|---|---|
Loan pools ($m) | 377 | 309 | 22 |
Revenue ($m) | 36.8 | 33.5 | 10 |
U'lying NPAT ($m) | 7.1 | 6.2 | 13 |
EPS (c) | 5.65 | 4.99 | 13 |
Interim div 3.0 cents, unchanged, fully franked, ex date 1 Mar |
Our only gripe is that 30-day arrears increased from a record-low 1.3% a year ago to 1.7%. This is still well below average so we aren't too concerned, but we'll be watching this number closely, particularly as the Services division suggests more people are in financial distress.
FSA's Lending division mainly deals with distressed borrowers trying to consolidate their debts, so the division is very high risk. It could blow up entirely if arrears get out of hand, though the debts are non-recourse to the parent company. FSA shouldn't lose much equity or risk bankruptcy itself.
Overall, underlying net profit for the period rose 13% to $7.1m. Management expects full-year earnings per share of 12–13 cents, up 5–15%. Using the mid-point of that range, the stock trades on an undemanding forward price-earnings ratio of around 12. FSA is hovering just above our recommended Buy price of $1.50 and we're likely to upgrade the stock if it settles below that level. For now, though, we're sticking with HOLD.
Note: With several substantial shareholders, FSA Group's stock is highly illiquid with a large spread between the bid and offer prices. To ensure you aren't caught overpaying, it's important that your buy orders have a limit price and are not made ‘At Market'.
Disclosure: The author owns shares in FSA Group.