As I wrote earlier today, shares in Cash Converters International Ltd (ASX: CCV) have been hit hard in recent weeks by the announcement of a second class action against the company.
Adding injury to insult, shares were smashed down another 10% after the company released its full-year results to the market. Here are the highlights from today's announcement:
- Revenue rose 13% to $375m
- Net loss after tax of $21.4m, down from profit of $24.1m in 2014
- Strong growth in business segments, particularly Financial Services
- Corporate costs grew by 9.5%, slower than revenue
- No final dividend
- $94m cash at bank, debt of $127m
- Bad debt percentage written off was 7% (2014: 6.6%), broadly in line with historical trends
- By segment, Australia grew Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) by 26.4%, UK loss increased by 750% and International EBITDA fell 15%
- Outlook for further growth in 2016 as benefits from Kentsleigh/Cliffview transactions flow through + store acquisitions and organic growth
- UK to see improvement thanks to changes to business + benefits from new legislation in the form of competitors closing down
So What?
It was pleasing to see the business was still able to significantly grow its operations in Australia, although readers will note that much of the improvement again comes from the company's financial services segment rather than its store operations, which only grew 1.4%.
The results from the UK could be best described as a disaster, with segment EBITDA ballooning 750% out to a loss of $9m right around the time investors were hoping the business would move towards profitability.
On the plus side, a management shake-up has seen a 'very experienced and successful multi-store owner' appointed as head of the corporate stores in the UK. Cash Converters also indicated the beginning of a return to normality after the impact of legislation on its loans business earlier this year. Unfavourable legislation in the UK also appears to have had a hidden benefit in that the company is seeing an increase to customer numbers as a result of the closure of competitors.
Now What?
Changes to legislation around 'payday' or 'micro' lending are still one of the primary risks for Cash Converters going forwards, particularly given that most of its growth in Australia comes from within this sector.
With a number of unfavourable media reports around the Australian sector recently, it's likely that political will to act is rising. However, Cashies has shown in the past it can adapt quite well to new legislation and the likelihood of the company being literally legislated out of business appears slim.
Shareholders will want to watch the turnaround in the UK stores closely, although the Australian business continues to be the flagship and main driver of earnings. Cash Converters looks cheap at today's prices, although there is a fair degree of uncertainty around the stock and I would encourage investors to build a position slowly.
