Despite confirming it's on track to meet its FY15 earnings guidance, shares in FlexiGroup Limited (ASX: FXL) have fallen sharply over the last week. At the same time, the company announced the departure of its Managing Director, Tarek Robbiati, after only two-and-a-half-years in the position. Investors have clearly taken the news badly with the share price falling by more than 12% to trade under $3 per share.
With the earnings outlook confirmed, has the market over-reacted? I think so, but I'm also a shareholder in the company so here are five reasons that I believe make the shares undervalued at the current price:
1. Growing Dividends – FlexiGroup has more than doubled its dividend over the past five years. At the current share price, investors can expect to receive a fully franked dividend yield of around 5.7%. That's over 8.1% when grossed up! Importantly for investors, the company has a conservative payout ratio of between 50-60% of earnings that means the company can use retained earnings for further investment while still being attractive as an income investment.
2. High return on equity (ROE) – FlexiGroup has been able to achieve strong growth in earnings while maintaining a ROE of about 24%. This is significantly higher than the financial services sector average. The ROE is an important figure for investors to consider as it measures the efficiency of a company to produce a return using shareholders funds. In FlexiGroup's case, it is able to create $24 in earnings for every $100 of invested equity. This compares favourably to Commonwealth Bank of Australia (ASX: CBA), for example, which can only create around $18 worth of earnings with the same equity.
3. Diversified earnings base – FlexiGroup offers a number of products that the major banks don't, including interest free credit cards, no interest ever finance solutions, commercial leasing, and mobile payment services. The company is also diversifying its earnings geographically and it has most recently acquired Telecom Rental NZ, which will significantly expand its current New Zealand operations. This diversification has expanded FlexiGroup's target market and continues to underpin its strong credit quality.
4. Investment in technology – FlexiGroup has been investing heavily in digital technology to improve productivity and reduce its cost base. The company is now utilising more automated systems that will reduce the time and resources needed for collections and documentation. Customers are also having a more engaging digital experience that is driving repeat business for both FlexiGroup and its retail partners. Continued investment in its core IT Systems will support future business growth and scale up the business to drive cost efficiencies.
5. Discounted Valuation – The company is trading on a price-to-earnings ratio of less than 10 at the current share price which is a considerable discount to the broader market. Considering FlexiGroup's management has already confirmed FY15's earnings and are forecasting a return to higher growth levels in FY16, the company appears to be undervalued at the current share price.
Foolish takeaway
While investors should naturally be more cautious when key personnel are replaced for any reason, I believe the market has over-reacted in this case. The underlying fundamentals of Flexigroup remain solid and I am confident a suitable replacement will be found to build on the strong platform already in place.
FlexiGroup offers a pretty good dividend but if you are looking for something even better you need to check this out!
