Re-Leasing Value
Many companies struggle when their core market reaches maturity. Some managers attempt to increase earnings through acquisitions, while others may choose to return capital to investors. But mature companies possess an asset that can be very valuable if effectively managed, and FlexiGroup is an example of a company that is attempting to use this particular asset to full effect.
For those unfamiliar with the company, FlexiGroup initially offered to consumers a single good lease product called FlexiRent. It was highly concentrated in computer and electrical retailers. With this limited exposure, the company suffered materially during the GFC, but management was subsequently able to diversify its earnings by expanding its customer and retailer network.
FlexiGroup built further on this platform by acquiring Certegy in 2008, a company that provides interest-free loans – you may know these as “Buy this piece of furniture and pay no interest for 40 months”. This was a complementary product suite for FlexiGroup – much like leases, interest-free loans are originated at the point of sale by customers that make large purchases, and then subsequently provide Flexigroup with a stable fee income.
Today, the FlexiRent brand has reached maturity, and while Certegy has been a standout performer for the business, we believe its growth is also starting to moderate. But as a result of organic and acquisitive growth in these divisions, the company now has a customer base of 700,000, and potential access to 250,000 more. This is a valuable asset that management hope to exploit through the cross-selling of complementary products.
The first opportunity the company is employing to tap this resource is a credit card offer. Just consider the returns that can be generated if even a fraction of FlexiGroup’s 700,000 strong database were to apply for a card.
The cost to produce and mail a credit card is negligible, and yet the margins that can be earned through interest are considerable.
Flexigroup has acquired two businesses for this strategy: Lombard Finance was acquired in 2012 and Once Credit was acquired in May 2013. Ultimately, the division can only generate earnings if customers activate their cards, and this is something that management is working hard on improving (the acquisitions have a combined activation rate of 45%, which is well below the industry average of 90%). While it may take time for the initiative to translate to sizeable returns, it does demonstrate how valuable a large customer base can be to a management team that is capable of innovation and excellent execution.
The Montgomery Fund holds a position in FlexiGroup, and looks forward to the company’s full year results.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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