Q1: This morning you have initiated coverage of Morses Club, can you tell us what it is they do?
A1: They are the second largest UK home credit lender, it lends money, typically in the £300-£400 on a contract which has got a fixed repayment agreement with the customers so if there’s late payment, there’s no additional payments required. At the end of February 2017, the company had 216,000 customers and it employed 1,826 self-employed agents to contact the customers and collect repayments.
In the first 6 months of its current financial year, it has increased its customer numbers by 12% to 233,000 and this has led to a 12% increase in its loan book so you can see the average loan per customer is unchanged. The management are careful to maintain lending per customer at an appropriate level because treating customers fairly requires control over additional client loans.
In recent months, the largest UK home credit lender, Provident Financial Group, has made a strategic decision to reduce its agency headcount from 4,500 self-employed agents to 2,500 fully employed Customer Experience Managers. This strategic change has led to a large number of experienced agents to leave Provident Financial and Morses Club has an opportunity to increase its self-employed agency network.
Q2: What kind of news flow should we expect to see over the coming months?
A2: Well, first of all, let’s have a quick look at what news we’ve had over the last month and then look forward.
So, at the end of August, the company released 2 trading statements, one announced a £15 million increase in its bank facilities from £25 million to £40 million and the second statement confirmed that they were trading well. It had increased its loan book by 12%, as I’ve previously mentioned, and it will build at least 400 more agent territories this year.
On the 5th October, late next week, the company will publish its interim results. These interims should provide further evidence of the growth in its network and that growth in the network should lead to increased revenues and increased profits in 2018 calendar year and beyond.
Now, Christmas is a seasonally busy period for home credit providers, we expect the leading provider, Provident Financial, to continue to have operational problems because the change from self-employed to fully employed is problematic and will unfortunately reduce the credit that they issue. This may be an opportunity for Morses Club to grow its clients per agent, and consequently the overall loan book. Our forecasts do not reflect an increase in credit issued by the company in the second half of its financial year, so covering this Christmas.
The first half of the financial year for the company was a very strong period of credit issued growth, credit issued increased by 25% and for the full year we cautiously assume only an 11% increase to £160 million. Now, if the quantity of the credit issued is high, this could lead to increased current year earnings, the management need to analyse the repayment of these pre-Christmas loans before making a trading update.
So, shortly after its financial end which is in late February, we expect them to provide a detailed trading update, the full year results will be reported in April.
Q3: Morses Club is currently trading at 144p, is this really a good time to buy shares do you think?
A3: I think we should think about four things, one is the valuation, the next is the seasonal timing of an investment in MCL, the third is the cyclical timing in terms of where we are in the business cycle and the fourth, structurally, what are the structural issues that we should bear in mind.
So, first of all, in terms of valuation, at 144p a share, the company offers investors the prospect of a 4.7% dividend yield and double-digit growth. We expect a 19% dividend growth in 2018/2019 and then in the following year, we expect it to be around about 12%. So, it’s attractive on valuation grounds.
Secondly, there is seasonal timing, Autumn is a good time to invest in home credit businesses because the first half of the year is complete and we know where we are for the first half and then we have the most important lending period, Christmas, about to begin.
The third is cyclical timing, now home credit businesses tend to trade well in difficult economic conditions, certainly they traded well in the last two recessions. So, I think investors should be quite confident that cyclically this is a good time to be thinking about investing in the company.
Fourthly, structurally, investors should recognise that the prospects for the company have dramatically improved since August, it has now got the £40 million bank facility, it has got hundreds of new agents, it’s got prospects of even more agents coming on board if that’s what they want and these agents should be productive in calendar year 2018 and beyond.
So, I think that in the next 6 months, we should see the company trading at between £1.67 and £2.00 a share and certainly, I expect, following the interim results on 5th October, I think the shares should do well.