Q1: Your recent note was in response to Anexo Group’s announcement in mid-November of a new major shareholder and a separate opportunity to expand its introducer network. To start with, what do you think that DBAY Investors’ acquisition of a 29% stake meant for the company?
A1: I think there are several points to make here.
Firstly, we feel it represents significant support for the company’s growth strategy, I think their business has plenty of scope for growth as it continues to gain share in its own market focus. Within that market, obviously, the impecunious motorists continue to need the company’s support when they’re involved in a non-fault accident and the group’s introducer model brings a regular flow of business.
Secondly, the share purchase reduces the amount held by the free selling shareholders from a combined 67.5% closer to 38.5%, opening up the share register a bit more in terms of the spread of holders and reducing the sense of a share overhang from that source. It also adds a 1.50p per share reference point for any further disposals by those same sellers in the near term.
Thirdly, it gives DBAY the right to appoint up to 3 non-executive directors and that, I think, should add wider expertise to the Board and perhaps some further focus on the execution and strategy.
Q2: In terms of the trading update within the announcement, what were the main points that we should be looking at?
A2: Well, for the current half-year, the Board continues to expect second half of 2020 underlying profit before tax, and that’s really before the cost of investment in the VW emissions case acquisition, to recover fairly strongly from the first half levels.
I guess the key point was the pace from which the group has been able to grow the Credit Hire business up to the point that they were putting the announcement out in November for the second half.
That was really down to the opportunity that the group had to pick up a number of new introducers following the withdrawal of several competitors from the market and as a result, the company was able to expand the number of its vehicles on the road rather faster than we’d anticipated. In fact, it had 1,902 vehicles on the road compared to 1,380 at the end of the first half so it’s probably no surprise that management flagged that it expects the average number of vehicles on the road for the FY20 to exceed the figure of the previous year.
Q3: What impact does this unexpected opportunity to pick up the pace of growth in the Credit Hire business have on cash flow?
A3: I think that’s an important question because the group are definitely being very focussed on its cash collection in the interim results announcement and it obviously remains as key metric for the company.
As a reminder, collections from settled cases from the first half of the current financial year increased by nearly 31% on the first half of 2019 and I think the Board has said that it still expects overall cash collections for FY20 to be ahead of the 2019 total.
It ended the half-year with net debt of £19.6 million and absenting the acquisitions, we originally anticipated that this was going to reduce further by the end of 2020. I guess, given the ability to generate cash in a given period that that reflects the balance between the availability of capital to support the growth in new cases and the number of litigators available to recover cash from the case load.
On top of that, management has been aware of investors wishes to see good cash generation, inevitably that balance can constrain the pace of growth and means that the group must maintain a practical balance, I guess, between the Legal Services and the Credit Hire business.
In this instance, it looks like an opportunity that’s too good to miss because as well as providing impetus to the company’s growth prospects, it also prevents quality introductions from going to its remaining competitors.
In terms of the cash flow side of it, essentially taking advantages of the new introducers meant that the balance shifted back towards growth in the new business compared to the view we had at the time of the interims. That means it’s going to be a period of cash absorption rather than cash generation in the second so we should expect a pickup in the net debt at the year-end compared to where it was at the end of June.
Q4: Finally, there was a brief mention of the VW emissions case in Anexo Group’s announcement, what did they say in that?
A4: The RNS really said that up to that point in Mid-November, the group was actively engaged on 13,155 cases and its marketing campaigns were ongoing at that stage. The company is also continuing to explore potential emissions claims involving other manufacturers as well.
Just for some context, on the VW case the group has spent about £0.9 million in FY19 and £0.7 million in H120 in gathering cases and they’re expected to invest another £4 million during the second half of 2020. It does obviously have access to £2.1 million of funds from a litigation funder with which to help fund the acquisition and further cases. Those costs that the company highlighted are reflected in our estimates but we don’t include any revenues for the VW emissions case.
As I mentioned earlier, the Board is expecting improvement in H2 from H1 this year and the usual point is that, as with all market estimates at the moment, obviously we reiterate there’s a caveat on the influence of the current operating environment and all those numbers that are out there at the moment.