Yesterday it was announced that EZCORP would be increasing their stake in CCV from 33% to 53%. This would be initiated through a 91c per share offering, pending approval from 50% of the shareholders and the Supreme Court of WA.
In addition to this controlling interest, Cash Converters and EZCORP will enter into a strategic alliance to develop more financial products, building on Cash Converters' experience as a consumer lender.
CCV and EZCORP will form a couple of JVs:
One equally owned to focus on consumer loans opportunities outside Australia, UK, and the Americas.
One owned 80% by EZCORP and 20% by CCV which will focus on consumer loans opportunities in the Americas.
Loans products will be marketed under the Cash Converters brand.
Cash Converters have been deliberately focusing on their loans business for future growth (observe the rapid takeup in the UK, where the loans business is still in the startup phase), and this new strategic alliance will focus these efforts in new markets.
As outlined in my previous article on CCV, I was awaiting an announcement from EZCORP to take over the entire company. I do not intend to sell my stake at this stage, as this strategic alliance opens huge potential in these new markets.
Cash Converters has just reported its most successful half year trading with profit from ordinary activities after tax reaching a record $14.3M for the first half of fiscal year 2011. The result is a 42% improvement on the $10.1M profit for the same period last year and a 24% improvement on the previous six month profit of $11.6M.
ReplyDeleteReviewing the two publicly available broker reports, Ord Minnett had predicted a $13.4M profit for the half and Hartleys $12.2M. So the company certainly beat market expectations for the half. What I find impressive about the result is tucked away at the top of page 17 of the half yearly report. As we know, Ezcorp with its capital contribution enabled Cash Converters to increase its loan books but more importantly buy franchise operated stores. From an accounting perspective, if the acquisitions that Cash Converters made during the six months had of been made at the start of the period, according to the company the profit would have been just over $17M for the half or a 70% increase from last year.
Keep in mind that Cash Converters in the UK lost $0.27M as it rolls out its finance business. It also opened 7 new stores which are always loss making to start. I have read that it can take up to 3 to 4 years before a store matures and becomes profitable. Compare the Australian result with 39 company stores with a pre tax contribution of $4.4M compared to the UK result with 41 company stores and a pre tax contribution of $1.3M. As the UK network of stores mature, I expect that there will be substantial growth.
The company is being coy about profit forecasts, it just states that it is on target to meet or improve on the $27M to $27.5M range that it has provided.
I have serious concerns with the press release in regards to the alliance with Ezcorp Inc. While I think an alliance would be a good for CCV, if you read the document in full, if this scheme gets voted in and passed by the courts, I am forced (I don’t get a choice) to sell 30% of my holding at 91 cents a unit. No new shares are being offered. What a way to get control, I wished I had of invested in Ezcorp Inc, these guys are good.
Hi Brian, thanks for your insightful notes.
ReplyDeleteEZCORP are no dummies and there must be a reason for them not taking full control - maybe they'd prefer Cash Converters management to have some skin in the game, due to their short-term credit expertise.
With shares still in the 80s, one could profitably increase their holdings to offset a 30% capital acquisition at 91c, but I'm reading the current share price of CCV as the market anticipating the transaction being blocked by either the shareholders or the courts.
I'm straight holding myself for now.
Hi Leon
ReplyDeleteIt will certainly be interesting to see what happens. After the announcement, I was expecting the price to head North, not South. I believe there is a buying opportunity at the moment and intend to increase my holdings to cover the likelihood of a 30% reduction after July 2011. Blessed are the risk takers I say. In for a penny, in for a pound!
My view is that the scheme of arrangement will get the go ahead by the majority of shareholders and will then be rubberstamped by the court. If the arrangement is voted down, I believe Ezcorp will then launch a formal takeover bid to obtain control of the company. World domination awaits Ezcorp in that market, they are not going to be put off by a few small shareholders.
I have based some of my views on commentary provided by Hartleys and Ord Minnett. While both are waiting for the independent report to be released, they certainly are not sounding negative of the pending deal. I would assume that their clients are largely guided by their advice and would follow their instructions.
Mr Scott from Ord Minnett states ‘one can debate the price paid but it is a decent premium’. Mr Scott believes that management and the board see further upside in the Cash Converters business and therefore have limited Ezcorp to 53% of the shares outstanding.
Mr Barnett from Hartleys states ‘if you can rationalise the lack of a control premium we believe the transaction price is reasonable. We have had a valuation for CCV around 80-90cps for the last two years, and need more clarity about the potential future contribution for CCV shareholders from the Alliance in order to significantly increase our valuation. We expect more information in the independent expert’s report. We have reduced our recommendation to Hold given we see less than 20% total shareholder return over the coming year’.
Leon, I believe that by Hartleys reducing their recommendation to a hold has impacted on the recent price. Prior to Ezcorp entering the scene, whenever CCV wanted to raise capital, they would normally turn to Hartleys who would offer the shares at a discount to their clients.
Hartleys have a 12 month outlook of 98 cents. With the current price at 81 cents a share plus dividends, if Hartleys are correct in their forecasts then there will be a greater than 20 per cent return. I expect the recommendation will be upgraded quickly. Interesting that Ord Minnett have upgraded to a buy status in the last few weeks and have not changed that status since the announcement.
Anyway, this play for control of CCV will be interesting and hopefully profitable to us all. I have promised the misses a trip to Perth so I might be there for the meeting and vote in person.
I am enjoying reading your blogs, please keep your reviews coming. I am currently running the ruler over FSA Limited (ASX FSA). I like the p/e ratio of 5.5 and the business model and at 32 cents a share, appears to be a bargain. Would be interested in hearing your thoughts if you follow the share. It’s making a profit which is my first basic requirement.
Cheers
Brian