On 26 February, Morses Club Plc (LON:MCL) announced the acquisition of the online lender CURO Transatlantic for a consideration of ca.£8.5m. Curo has a net loan book of ca.£10m and 50,000 customers. This deal is strategic in that it transforms the online lending business with a much-enhanced decision engine, infrastructure, carefully selected customers and all for a discount to book. MCL also announced the acquisitions of Eccles Savings and Loans, on 31 January, and of Hays Credit LLP, on 12 February. These add ca.5,700 customers (there were 230,000 at MCL’s 1H FY’19) and may be characterised as a resumption of add-on deals in the core business.
Impact on FY’20: Eccles and Hays should enhance statutory earnings by ca.2% and we have seen a further small uplift from the trading statement. However, in its first year, Curo will reduce them. The net effect to our adjusted FY’20 pre-tax profit estimate is a reduction of 6% to £23.2m, from £24.6m.
Outlook: Curo is expected, by us and MCL, to be earnings enhancing in FY’21 as the business rebuilds its book post takeover. Perhaps more important are the strategic benefits from the deal, which include online scale economies, improved data analytics, robust new infrastructure and lower investment cost.
Valuation: We detailed a range of valuation approaches and sensitivities in our note, ‘Bringing home collect into the 21st century’, published 2 February 2017, and do so again in the section below. The range in absolute valuation methodologies is marginally reduced to 169p-219p.
Risks: Credit risk is high (albeit inflated by accounting rules) but MCL adopts the right approach to affordability and credit assessment. Regulatory risk is a factor, although high customer satisfaction suggests a limited need for change. MCL was the first major HCC firm to receive full FCA authorisation.
Investment summary: MCL is operating in an attractive market and has a dual-fold strategy that should deliver improved performance from existing businesses and new growth options. MCL conservatively manages risk and compliance, especially in new areas. The agent network is the competitive advantage over remote lenders. The valuation appears an anomaly, and we forecast a 4.4% February 2019 dividend yield, with cover of 1.7x (adj. earnings).
