The FY18 results saw adjusted pre-tax profits £1m and statutory profits £2.7m ahead of our expectations. Morses Club (LON:MCL) has focused resources on optimising the potential from the market leader’s self-inflicted woes and so increased its agent franchise by over 20%, adding high-quality customers. This focus meant that, despite the strong lending growth, impairments as a percentage of revenue fell in 2H on 1H. Historical conservative provisioning sees the conversion to IFRS9 having a much smaller impact on receivables than peers. New business streams are being introduced to continue growth. Our range of valuation methodologies is currently 171-197p.
FY18 results: Revenue grew 17%. Impairments rose as a percentage of revenue (to 26.1% from 24.4% in FY17) but were lower in 2HFY18 than 1HFY18. MCL has focused growth on the best-quality customers. Efficiency improved 6%. Excluding exceptionals and one-offs, underlying pre-tax profit rose 29%.
Outlook: The results confirmed MCL’s strategy to deliver sustainable growth. There is upside from the agents hired in FY18, and Morses Club Card has grown (Feb 2018: 21k customers, £10.6m loan balances, vs. Feb 2017: £10k, £3.9m). New online portal products should help customer retention and acquisitions.
Valuation: We detailed a range of valuation approaches and sensitivities in our note, Bringing home collect into the 21st century, and do so again in the section below. Both the higher earnings forecasts and equity see an increase in our valuation, with the range now 171p to 197p (average 184p).
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 get full FCA authorisation.
Investment summary: MCL is operating in an attractive market, and it has a dual-fold 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 has material upside, and we forecast a 5.0% February 2019 dividend yield, with cover of 1.6x (adj. earnings).