FSA Group: Interim result 2019

It seems the Australian economy might be regaining its strength. The number of new clients for FSA Group's counter-cyclical debt agreement division fell 10% in the six months to December, which implies fewer people in financial distress nationwide. The decline in clients, however, was ahead of a 16% decline for the overall market and suggests the company increased its already dominant market share. We're glad to see the turnaround as the company had lost market share in debt agreements over the past few years.

This was the first reporting period under a new accounting standard for the debt agreement business (AASB 15, for those looking for a little bedtime reading). The new standard aligns revenue recognition with the collection of cash, whereas previously there was a material mismatch. Revenue for the division rose 7% to $19.2m, while pre-tax profits rose 59% under the new standard and after re-stating last year's result to also reflect it. Total revenue increased 9% to $35.9m and net profit was up 40% to $7.7m for the half.

Amendments to the Bankruptcy Act, which take effect in June, will limit the time to repay a debt agreement to three years. Management said this could mean a reduction in clients for the Debt Agreement business because a three-year term may not allow for an acceptable rate of return to some creditors. FSA, however, offers many different services to people in financial distress, such as personal insolvency agreements and bankruptcy. 'We do not see these amendments as having a material impact on the number of clients we are able to assist or the long-term financial performance of FSA', said management.

The company's consumer lending division also had a good six months, with total loan pools up 13% to $428m. The division achieved a pre-tax profit of $5.3m, up 20%. Management is on track to reach its five-year goal of $500m in loan pools by June 2020. 

The stock trades on a price-earnings ratio of 10 and a fully-franked dividend yield of 5.5%. That looks cheap for a company with a dominant market share, good management, high margins and returns on capital, and decent growth prospects. We're sticking with SPECULATIVE BUY.

Note: With several substantial shareholders, FSA Group's stock is highly illiquid with a large spread between 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.