When FSA Group reported its interim result, we said ‘The only real stain on this result is a deteriorating Business Lending division … hopefully the company chooses to wind down the division’.
Just a couple of months later, the company has done even better. FSA has agreed to sell its Business Lending division (known as 180 Group) to CML Group, a payroll and employment services company. FSA will receive $10m after tax in cash, which we think is a fair price for this declining – and decidedly risky – business.
180 Group offers factoring finance secured against unpaid invoices to small businesses so they can manage their cash flow. The division has been a poor performer for many years and we were becoming uneasy with its deteriorating profitability. The proportion of loans in arrears increased from 7.8% to 8.9% in the six months to December – well above the 4.8% achieved in 2014.
Thankfully, 180 Group was only ever a small thorn, having around 116 clients and a loan pool of $30m. It contributed around $1.9m, or 12%, of net profit over the past 12 months. We're happy to see it go so that management can focus on its high-margin debt agreement division and less risky secured mortgage lending.
The stock has risen 11% since we upgraded it in FSA Group: Interim result 2016 on 26 Feb 16 (Speculative Buy – $0.96). Having tipped past our Buy price, we’re downgrading to HOLD.
Disclosure: The author owns shares in FSA Group.