Morses Club PLC (LON:MCL) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You called your recent note “Value-added, customer-driven expansion from core”, what can you tell us about that?
A1: Morses Club’s October results highlighted the strength of its traditional and core business in Home Collect. That division showed operational efficiency improvements, the appropriate use of technology and improving credit generating double-digit underlying profit growth, despite a stable market. Importantly, the agent-driven model uses technology to improve performance and unlike some others has not changed the model to meet technology.
In our note, what we focused on was MCL’s strategy to expand from this strong core business. The strategy is driven by extensive customer surveys and could see a doubling in both the number of customers and the share of wallet over the medium term. Investment is being paced to balance short- and long-term profitability.
Q2: It sounds like you think how the strategy was formulated from customers is important. Why?
A2: Some companies formulate their strategy from the CEO’s perception of what customers may want. Others, like MCL, dive deep into the customers’ actual preferences through surveys, feedback and behavioural analysis. We believe the latter is a more robust approach to setting a strategy to meet customer demand.
MCL’s CEO, in the recent results meeting, advised that the proposition now being advanced was derived from more than 100 surveys over several years. While the core HCC business has many attractions, it is clear that there is significant potential to retain and win more customers and serve a greater part of their wallet than offering this product in isolation.
We note that, in its recent Capital Markets day, Provident Financial reported many of the same customer demands, while outlining its approach to Provident Direct.
Q3: So, what is the company expanding into?
A3: Morses is rolling out two major products to its customer base (online loans and current accounts) as well as developing a customer portal with a broad range of services. The product areas were transformed by acquisitions in 2019 – in online lending with CURO Transatlantic and in current accounts with U Holdings Limited. Both brought to Morses Club key product systems, experience and data, which can then be applied to both new customers but also in many cases across Morses Club existing customer base.
Looking at the online lending business : i) historically, CURO delivered very strong growth in this area; ii) the acquired analytics have been based on huge datasets of customers; iii) intermediaries are always looking for new suppliers of credit; iv) the potential market is huge; v) we believe that, if economic conditions weaken, a number of peripheral players will withdraw; and vi) the redress for historical mis-selling is likely to put pressure on some other lenders in the same way as it did on CTL.
Q4: And how big is the opportunity for Morses Club?
A4: There are three aspects to consider.
First, how much of the customer wallet can Morses Club serve. MCL advises that, for HCC customers, home collect is, on average, only 27% of their total debt. Customers additionally hold nearly 20% in credit cards and overdrafts, 11% in unsecured personal loans, a couple of percent in high-cost, short-term credit, and the balance in things like store cards, catalogue debt, motor finance, etc. The expanded product and distribution range now offered is believed to serve 59% of the customer wallet, compared with 27% in HCC alone.
Second is retaining customers who may have left Morses Club to take up other products elsewhere. For MCL, around 40,000 customers (ca.20%) leave every year, although, over time, around 16,000 of these will ultimately return to the company for credit at some future date. While some of the 24,000 permanent leavers no longer need credit, the vast majority take credit from other providers at a lower cost, as their credit records have improved.
Finally, there are totally new customers who would never have taken the home collect product and having options for younger customers with the same financial needs is an opportunity for MCL[?]. Financially, management expects the online business alone to deliver an extra 5-10% to adjusted pre-tax profits in FY’22 while strategically it creates options for growth which home collect alone cannot offer.