Recessionary conditions usually mean good news for Fairpoint because its core business involves the provision of debt management solutions for people that can't repay borrowers. Admittedly, today's very low interest rates, and a more accommodative stance by creditors, has meant that the usual increase in distressed borrowers associated with an economic downturn hasn't yet materialised. But investors should be patient – while management reckons that interest rates are unlikely to rise before 2104, when they do start rising, the resulting squeeze should see more consumers seeking financial help.
- Attractive dividend yield
- Impressive cash generation
- Continued diversification
- Shares trade below net assets
- IVA business hit by low interest rates
- Move into pay-day loans carries risk
Fairpoint has also been successfully adjusting to current conditions by cutting costs – annualised savings of £1m were made in 2011 – and through diversifying its revenue stream. Revenue generated from activities unconnected to individual voluntary arrangements (IVAs) rose from 17 per cent of group revenue in 2010 to 30 per cent last year. That's just as well – new IVAs written last year fell by 30 per cent to 5,840, and fees per customer dropped a little to £2,083.
In fact, Fairpoint's attempts to diversify away from IVAs is progressing well and, last year, income from the financial services arm more than doubled to £2.4m. Much of the improvement came from commencing a programme of payment protection insurance reclaim activity with the existing IVA customer base. The financial services business also includes a venture into pay-day lending under the group's Loanextra banner – a potentially promising source of growth. Although the weaker credit profiles of borrowers in this market makes this a risky area for newcomers and any credit control glitches could mean bad news for bad debts. Fairpoint's background in the IVA sector, however, should help it avoid such pitfalls.
| FAIRPOINT (FRP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 65p | MARKET VALUE: | £28m | |
| TOUCH: | 65-66p | 12-MONTH HIGH: | 73p | LOW: 43p |
| DIVIDEND YIELD: | 7.7% | PE RATIO: | 5 | |
| NET ASSET VALUE: | 83p | NET DEBT: | 4%† | |
| Year to Dec 31 | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 26.5 | 1.12 | 1.51 | nil |
| 2009 | 28.9 | 5.72 | 9.47 | 2.0 |
| 2010 | 29.4 | 5.85 | 9.56 | 4.0 |
| 2011 | 25.9 | -1.04 | -2.20 | 4.5 |
| 2012* | 29.8 | 7.58 | 12.8 | 5.0 |
| % change | +15 | - | - | +11 |
*Shore Capital estimates (earnings per share data adjusted – not comparable to prior years) Normal market size: 3,000 Market makers: 6 Beta:0.16 †As at 19 June 2012 | ||||
Fairpoint also offers debt management plans (DMP) – for people who can make repayments in some form, but need flexibility on the repayment schedule and the interest that accrues on the borrowings. Revenue here grew by a robust 29 per cent last year, to £5.3m, and the division has also received a boost after Fairpoint made four DMP back book acquisitions, taking the total number of schemes under management up to 15,838.
Tight cost control has helped the group to bring down borrowings rapidly – they've fallen from £6.4m at end-December to £1.6m last month. And that's before the receipt of proceeds from a successful effort to reclaim VAT – management reckons that could be worth around £4.5m. Moreover, the group's £8m debt facility with Royal Bank of Scotland, originally due to expire in December, has now been increased to £13m and extended to 2016.
