Hot Stock: FlexiGroup (FXL.ASX)

Monday 19th September 2016

Building scale in the right places

To say there have been some ups and downs for FlexiGroup since the stock arrived on the Australian Stock Exchange a decade ago is something of an understatement. The leasing and finance group listed with some fanfare around a year before the GFC, after which reality set in rather abruptly.

While FlexiGroup’s share price subsequently rallied ten-fold post the GFC, the last two and a half years have seen another significant share price de-rating for FlexiGroup from lofty levels, with the company seeing increased competition from banks, which has impacted consensus earnings forecasts.

Investors have also been unsettled by disruption to senior management. We however believe the tide is turning, with an improved earnings outlook following a series of recently implemented restructuring initiatives. This has seen the divestment of non-core, low margin businesses, while core operations have been boosted by a meaningful acquisition.

The company’s management team is also in much better shape, with the strategic direction now back in the hands of the company’s Chairman and co-founder. The company has also sought to diversify its geographical reach, a process which has been supercharged by the acquisition of Fisher and Paykel Finance.

FlexiGroup is also looking to other avenues for growth, having taken a minority stake in fintech lender Kikka Capital for $2 million in May. Kikka’s proprietary credit model provides growth capital to small businesses and has the fastest origination process currently in the market.

Management are also well aware that existing product offerings need to adapt to what is a dynamic operating environment. FlexiGroup plans to unveil a new product next month, specifically designed to appeal to ‘millennial’ consumers who are likely to be more open to leasing household items.

Such a nimble and technologically aware approach is also delivering significant new business wins. Last month the company announced that it has won a deal with Flight Centre to offer the travel agency’s customers interest-free loans. While it is difficult to say at this stage how big an earnings contribution this initiative will make, it will be incrementally positive.

From a valuation perspective the shares are modestly priced in our view, at around 9 times FY17 earnings, with a dividend yield approaching 7 percent. This, in combination with a better technical set-up, provides us with increased confidence that a key inflection point in FlexiGroup’s share price has been reached.

James Lennon is a senior analyst at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

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