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Inspect undervalued Morses Club

The newly public sub-prime lender is growing its loan book through a combination of acquisitions and agent recruitment
November 3, 2016

The continuing demand for sub-prime credit has worked wonders for the loan book of recently floated Morses Club (MCL). Credit issued grew by 17 per cent to £66m during the first six months of this year alone. In a highly-fragmented industry Morses Club is not just growing organically but also through acquiring smaller lenders that are unable to deal with the growing burden of compliance. But despite Morses Club's growth potential its shares are valued at a large discount to its more mature rivals, such as Provident Financial (PFG).

IC TIP: Buy at 120p
Tip style
Income
Risk rating
Medium
Timescale
Long Term
Bull points
  • Growing credit issuance
  • Higher-quality customers
  • A discount to peers
  • Consolidation opportunities
Bear points
  • Rising commission costs
  • Online lending competition

Morses Club only began trading on Aim in May, after merging with Shopacheck Financial Services the previous year. This merger was undertaken by private equity group RCapital, which sold its 49 per cent stake when Morses Club listed. A key focus for Morses' organic growth has been attracting agents from rival lenders to its home credit business. The hope is that these agents will bring their existing clients with them, once the terms of clients' old loans expire. Management pays these agents a subsidy during the first year of their employment while they build customers.

In the short term this has taken a bite out of pre-tax profit, and agent commission costs rose 18.5 per cent in the first half to £10.9m. However, the longer-term benefit is these agents don't just bring new business, but typically higher-quality customers that borrow for a shorter duration. At the end of August, the lender was building agent numbers in 114 new territories, up from 68 the previous year. This strategy is already starting to bear fruit, with gross balances attributable to what management defines as higher-quality customers up 6 per cent at the half-year stage, as well as a 5 per cent reduction in the average duration of its loans to 42 weeks.

The Financial Conduct Authority (FCA) took over responsibility for regulating consumer finance companies from the Office of Fair Trading in 2014 and is still in the process of fully-authorising some 50,000 consumer credit companies to trade. This means there should be plenty of further opportunity for consolidation in the industry, as smaller operators find it harder and more costly to meet the standards required by the FCA. Taking advantage of these opportunities is an important part of Morses Club's growth strategy. The lender has bought five smaller lenders so far this year, adding a total of 18,500 customers and £6.5m in gross receivables.

However, Morses Club is not just content with home credit. Digital development is high up management's agenda and an online lending platform is due to be launched by the end of this year. A recently launched clubcard, meanwhile, allows customers that don't have access to a debit or credit card to spend online and in stores. The group had issued 5,000 by the end of August, exceeding its target for the year within the six months of launch.

MORSES CLUB (MCL)

ORD PRICE:120pMARKET VALUE:£155m
TOUCH:118-122p12-MONTH HIGH:133pLOW: 84p
FORWARD DIVIDEND YIELD:5.8%FORWARD PE RATIO:10
NET ASSET VALUE:45pNET DEBT:5%

Year to 27 FebTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2016*9116.910.3na
2017**10017.510.76.4
2018**11219.011.77.0
% change+22+9+9+9

Normal market size: 2,500

Matched bargain trading

Beta: 0.05

*Pre-IPO figures

**Shore Capital forecasts, adjusted EPS and PTP figures