A rock-bottom earnings multiple and a 5 per cent forecast yield are more a reflection of Fairpoint's (FRP) past difficulties as a struggling provider of Individual Voluntary Arrangements (IVAs) than its future prospects in the lucrative new markets it has recently diversified into. Sentiment towards Fairpoint's shares has been tarnished by weak demand for IVAs (these agree repayment plans for overindebted consumers and allow some debt to be written off), which collapsed in today's world of low interest rates and greater lender flexibility. But management has been successfully diversifying.
- Diversifying into faster-growth areas
- Rising interest rates could provide a boost
- Attractive and well-covered dividend
- Shares undemandingly rated for the sector
- IVA unit under pressure
- Deals have increased debt
Fairpoint's IVA business is under pressure, but nevertheless, this month the group revealed that the division's profit had risen 11 per cent year on year to £1.3m, which was essentially down to tight cost controls. Chief executive Chris Moat reckons that "conditions in the IVA market place will continue to be challenging" with recent IVA volumes having been driven by consumers with lower disposable incomes - meaning reduced fees from IVA work.
Significantly, however, Fairpoint revealed a further shift away from IVAs at the half-year stage: 52 per cent of revenue now comes from non-IVA business, compared with 44 per cent a year earlier. That reflects a focus on acquiring books of debt management plans (DMPs). DMPs are less onerous for borrowers than IVAs and involve Fairpoint taking a proactive approach to helping tackle a customer's financial pressures. Growth here has been impressive, and at the half-year stage DMP-related revenue rose 45 per cent to £3.9m. That significantly reflects recent acquisitions: two DMP back books were acquired in January, while last month £3m was spent buying DMP specialist Debt Line Topco. The FCA's tougher regulatory regime could also force smaller operations to exit the market, potentially creating further acquisition opportunities.
FAIRPOINT (FRP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 134p | MARKET VALUE: | £58.7m | |
| TOUCH: | 133-135p | 12-MONTH HIGH: | 164p | LOW: 124p |
| FORWARD DIVIDEND YIELD: | 5.1% | FORWARD PE RATIO: | 8 | |
| NET ASSET VALUE: | 103p* | NET DEBT: | 16% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 25.9 | -1.0 | 6.8 | 4.5 |
| 2012 | 34.4 | 10.5 | 13.4 | 5.5 |
| 2013 | 28.4 | 5.9 | 15.0 | 6 |
| 2014* | 37.8 | 3.7 | 16.6 | 6.4 |
| 2015* | 49.3 | 7.0 | 17.8 | 6.8 |
| % change | +30 | +89 | +7 | +6 |
*Includes intangible assets of £33m, or 76p a share **Shore Capital forecasts, adjusted EPS figures Normal market size: 5,000 Matched bargain trading Beta:0.27 | ||||
Meanwhile, a recent move into legal services should drive even stronger growth. Fairpoint spent £7m in June buying solicitors firm Simpson Millar. On a pro-forma basis, Simpson Millar's revenues stand at nearly £17m, which boosts the group's overall revenues to over £45m and leaves legal services as Fairpoint's largest operation. Management reckons Fairpoint's debt management focus should offer strong synergies for many legally-related services - in areas ranging from family to employment law. Management also sounds confident that it will be able to generate a significant cost advantage over the many small firms of solicitors that traditionally operate in this space.
But that acquisition-led growth strategy has come at a cost: the end-2013 net cash position of £2.8m had become an £8.4m net debt pile by the end of August. But this still represents a fairly modest gearing ratio and, in May, Fairpoint negotiated a £20m five-year loan facility - providing plenty of headroom to fund further deals.
