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Hardman & Co

Morses Club Plc Steady, reliable core, growth in new business lines

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Morses Club Plc (LON:MCL) We took two key messages from the FY’19 results announced on 2 May. First, the core business is now in a reliable, steady state with modest organic volume growth. It should, however, generate profit growth from acquisition opportunities and technology-driven efficiency improvements. As always, the agents remain core to the group but incremental returns can be generated from managing them better. Conservatively managed growth is being driven from the new business lines. Management has indicated it expects FY’22 pre-tax profits of between £3m and £5m from its recent online lending acquisition (consideration was £8.5m). Our absolute valuation range is 181p to 243p.

FY’19 results: Looking through the accounting noise, revenue was up 6%, credit issued by 2.4%, and the net loan book by 6%. Efficiency improved with adjusted pre-tax profits up 14.6%. Impairments remained well controlled (22.4% of revenue, like-for-like FY’18, 22.5%). Customer numbers increased by 3% to 235k.


Outlook: The CTL deal could introduce some noise (both real and accounting). It will transform the profit and loss account, being a lower-cost but higherimpairments business than home collect. Although FY’19 was a beat against our forecasts, we have at this stage left our FY’20 forecast EPS largely unchanged.


Valuation: We detailed a range of valuation approaches and sensitivities in our initiation note, Bringing home collect into the 21st century, published 2 February 2017, and do so again in the section below. The range in absolute valuation methodologies is now 181p to 243p (previously 169p to 223p).
Risks: Credit risk is high (albeit inflated by accounting rules) but MCL adopts the right approach to affordability and credit assessment. Regulatory risk is a factor, although high customer satisfaction suggests a limited need for change. MCL was the first major HCC company to receive full FCA authorisation.


Investment summary: MCL is operating in an attractive market, and it has a dualfold strategy that should deliver an improved performance from existing businesses and new growth options. MCL conservatively manages risk and compliance, especially in new areas. The agent network is the competitive advantage over remote lenders. The valuation appears an anomaly, and we forecast a 5.7% February 2020 dividend yield, with cover of 1.6x (adj. earnings).