Morses Club (LON:MCL) is the topic of conversation when Hardman and Co’s Financial Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: What lessons did you learn from the recent Morses Club results?
A1: The company’s core HCC division once again delivered a strong performance. Market volumes remain subdued, but 11% underlying profit growth has been delivered, with efficiency gains and good credit (20% reported adjusted growth). The acquired businesses’ performances required incremental investment, and initial lending appears slightly behind track, but these issues are short-term and management has reiterated its stretching guidance for FY’20 and FY’21. We also note the cash collected from CTL loans at acquisition is £11m, against an £8m consideration.
Looking forward, management has outlined a clear, customer-demand-driven strategy in its area of competitive advantage.
Q2: It sounds like a game of two halves between the core business and new ones. What can you tell us about the historical core business?
A2: Adjusted profit before tax in the core business was up 20.2% to £13.1m (1HFY’19: £10.9m). There has been a continued focus on quality business, which has helped to reduce impairment as a percentage of revenue to 18.5% (1HFY’19: 21.4%). This has also seen a small reduction in customer numbers (224k vs. 1HFY’19’s 229k), but average balances increasing (August 2019 £607 vs. £590 in August 2018). Agent numbers are down to 1,817, from 1,942 in 1HFY’19, but 97.5% of agent rounds are fully staffed. The average agent book has increased with technology-driven efficiency improvements. This has further reduced the cost/income ratio to 57.5% (1HFY’19: 58.6%).
MCL also reported the successful launch of the customer portal, with 30,000 customers registered in the first six months, and 40,000 by end-September. The £2.2m rise in HCC profits was assisted by a 27-week period (vs. 26 weeks in prior year), which the company advises contributed £1m to profit and a small benefit to the cost ratio. Overall, we characterise these trends by saying double digit underlying profit growth in challenging markets is a highly credible performance, and reflects, we believe, payback for historical investments in technology and the good integration of self-employed agents.
Q3: And in the new businesses?
A3: The scale of pre-tax losses in 1HFY’20 (adjusted £3.5m, statutory £5m) was higher than we had expected, driven by a number of factors, primarily in the online business.
These include i) £1.2m of interest, which had been incorrectly accrued ahead of acquisition, was only identified once the company was able to get into the books in detail. ii) The expected loss of customers during the period when systems were being migrated to the MCL platform and it was unable to offer the full service. In the presentation, there was also a focus on the nature of product and the loss of customers, who, on acquisition, had very short facilities; and iii) The integration appears to have taken more work than we had expected.
It is, however, important to put these experiences into perspective. They are either historical or short-term and, while the 1HFY’20 performance may have been disappointing, it is crucially important that management has reiterated its goals, including monthly run-rate profitability by February 2020, 200k new loans p.a. by end- February 2021 and FY’21 profits of £3m-£5m (pre-interest). We believe the weak share price on the day of results reflected below expected performance in new businesses and the recovery in share price since reflects the market being convinced that the medium term outlook remains strong.
Q4: Many sub-prime lenders have strategically moved out of their core and failed. What can you tell us that is different about MCL’s approach?
A4: Their strategic vision is driven by customer-driven demand. From its dozens of customer surveys, it has identified how customers want to be served (primarily mobile, in addition to agent), which products they want and what they are willing to pay. With the development of online lending products, current account overdrafts and, in due course, credit cards, MCL believes it can address 59% of the customer wallet, compared with just 27% from HCC alone. This has required investment, but the pace of investment has been proportionate to the business. It has not incurred the losses seen by, say, Satsuma, and its acquisition of CTL has already seen more cash collected than consideration paid.
Q5: Finally, we saw the recent administration of QuickQuid. Any read across for Morses Club?
A5: None. Pay-day lending has no bearing on MCL, its model or financials. It is a totally different product with different customers and risks. Additionally, they do not face any compensation for historical mis-selling of pay-day lending which has proved crippling for both Wonga and QuickQuid. While there is no downside read across the opportunity to service those specific customers is also limited so no upside either.
