Cash Converters International Ltd reports revenue growth, but profit falls

Now could be a good time to add this great long-term growth stock to your portfolio.

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Top growth stock, Cash Converters International Ltd (ASX: CCV) this morning reported its half-year results to 31 December 2013, which showed a 15% increase in revenues but a sharp drop in net profit.

As a shareholder in Cashies, I know it can be tough to witness a 51.1% fall in net profit and a drop in EBITDA of 28.5% for a reporting period, but the results have to be taken in context.

The company makes a majority of its earnings from its financial services division – which includes cash advances and personal loans – which combined account for approximately 70% of group EBITDA before head office costs. As of July 1 2013 the Australian government introduced new regulatory requirements for lenders of small loans and capped the fees which were able to be charged to customers.

Other factors which reduced the EBITDA result included a provision for the Ausgroup investment ($1.1 million), stamp duty on store acquisitions ($1.8 million) and a loss from the company's Green Light Auto business ($292,000).

Buy in the trough…

As you can imagine, changes to the lending environment adversely (to say the least) impacted the earnings of the company. However, promisingly, management reported, "it was pleasing that the second quarter EBITDA result was up on the first quarter [from July to September]. This upward trend should continue in the second-half following a record breaking December lending performance in Australia for both the personal loans and cash advance products."

Although the total number of customers in Australia and the United Kingdom increased for both cash advances and personal loans, management's hand was forced to pencil in a 15.9% decline in EBITDA. The decline wasn't a result of poor performance and the company is quickly adapting to the changes. The cash advances business was worst affected, down 32.9% on the previous corresponding period to $4.9 million.

Cash Converters' UK offices account for a small percentage of earnings compared to Australia despite having more stores, 61 versus 63, respectively. However, the UK operations are yet to reach maturity and an impairment charge for bad debts – which accounted for a majority of the 25.1% decline in the division's personal loan portfolio – resulted in a 63.8% dip in EBITDA across both UK financial services divisions.

The UK store network also reported a lesser EBITDA result following increases to operating overheads to the tune of $1.93 million. $1.2 million of this was accredited to wage cost increases for a 'blue print' store concept trial, whereby better qualified staff are employed to drive KPI improvements. As a shareholder and investor, I like to see this type of initiative, particularly from a growth company like Cash Converters.

…Sell at the peaks

The company's recent expansion into New Zealand with a 25% equity stake in the NZ Master Franchisor presents an opportunity for the company to take the number of stores in the country from 14 to 50 in coming years. The company provided an outlook for the business today stating: "With the appropriate level of funding, the Company is confident that CCNZ will enjoy a strong period of growth over the next five years."

In addition to organic and acquisitive growth the company's Carboodle business – which allows customers who don't have access to a car loan, to buy a late model commercial or personal vehicle with insurance, registration, maintenance and roadside assistance all rolled into one easy weekly payment – notched up impressive growth. Although the business reported a loss of $292,880 for the period, active leases increased 29.7% to 778, forward contracted lease payments increased to $28.5 million and total revenue came in at $3.8 million.

Foolish takeaway

Early in trading, shares in Cashies were 3% higher but have since retracted. Don't sweat it. On the surface, profits and earnings per share have dropped but today's result was not unexpected. Although, for the full year, earnings will come in lower than FY13, the share price fall from above $1.40 to a current $0.90 has overwhelmingly reflected the short-term difficulties faced by the company due to the regulatory changes.

In my opinion, it is more likely we'll witness upside risks in the full-year report rather than further falls. Confidence is slowly returning to the Australian consumer market, credit is cheap and readily available, the UK economy is rebounding, management are growing the store network and the brand is yet to reach full maturity in New Zealand, the UK and possibly even Australia. If the share price drops, now could be a great time for long-term investors to get on board this big dividend and growth story.

Motley Fool Contributor Owen Raszkiewicz owns shares in Cash Converters.   

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