Fairpoint's turnaround story is already well advanced and growth prospects look good. But, despite strong share price performance over the last 12 months, the shares can still be picked up for just nine times forecast earnings with the promise of a yield of 5.7 per cent next year. What's more, following a £9m VAT rebate, the company has net cash which will help it fund growth through the acquisition of 'back-books' of debt management plans (DMP) to profitably run down.
- High and growing yield
- Strong cash flow
- Net cash
- Diversification continues
- IVA cases static
- Revenue per case lower
Fairpoint's move into the DMP business is part of a diversification strategy that has reduced its focus on individual voluntary agreements (IVAs). Many had expected a recession induced boom in IVAs, whereby an agreement is made between a distressed borrower and creditor to pay back a certain amount over a fixed period. However, low interest rates and a more benign approach by creditors meant the market has actually stagnated.
DMPs are less onerous than IVAs and involve Fairpoint taking a hands-on approach to sorting out someone's finances, deducting living expenses from their wages and arranging for the full amount owed to be paid back to creditors - sometimes taking as long as 15 years. Adjusted DMP operating profits last year rose 10 per cent to £2.2m and the company plans to continue buying 'back-books' which should be able to be financed through cash flows.
The other quickly expanding revenue stream is Fairpoint's financial services operation. This is split into offering help to make customers' money go further, and payment protection insurance (PPI) claims on behalf of its IVA clients. Creditors like the idea because any money reclaimed goes straight to them (meaning less commission). Profits last year jumped from £0.3m to £1.6m. PPI claims are finite, but there may be future opportunities in related areas, such as mortgage mis-selling.
| FAIRPOINT (FRP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 112p | MARKET VALUE: | £47m | |
| TOUCH: | 109-113p | 12-MONTH HIGH: | 120p | LOW: 61p |
| DIVIDEND YIELD: | 5.7% | PE RATIO: | 9 | |
| NET ASSET VALUE: | 97p | NET CASH: | £1.6m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 29.4 | 5.85 | 9.56 | 4.00 |
| 2011 | 25.9 | -1.04 | -2.20 | 4.50 |
| 2012 | 34.4 | 10.5 | 18.6 | 5.50 |
| 2013* | 32.2 | 6.64 | 11.8 | 6.00 |
| 2014* | 34.4 | 7.00 | 12.4 | 6.40 |
| % change | +7 | +5 | +5 | +7 |
Normal market size: 3,000 Market makers: 6 Beta:0.16 *Shore Capital estimates | ||||
IVAs still represent the largest part of the business, though, and last year accounted for 64 per cent of revenue and 56 per cent of underlying profit. But there is good news on this front, too, with profits last year more than doubling to £4.9m, which was achieved as a result of cutting the cost base and by including the positive impact of PPI claims on repayments. A less successful side of the business was short-term lending, which Fairpoint decided to wind up late last year, having notched up losses of £0.73m.
Turnaround specialist Hanover Investors, which was instrumental in pushing for change, recently sold its 23.8 per cent stake in Fairpoint (FRP). We are not concerned as we view the doubling of the share price since last June as only the first phase in the company's transformation. Indeed, the sale suggests that the Fairpoint is once again firing on all cylinders. And investors shouldn't be too concerned about the forecast drop in headline profits, because last year's numbers were boosted by a one-off £4.5m item relating to the £9m VAT refund and underlying 7 per cent EPS growth is forecast for 2013.
