Morses Club PLC (LON:MCL) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: I see that you’ve written a note on Morses Club’s recent acquisitions, can you tell us some more about them?
A1: On 26th February, MCL announced the strategic acquisition of an online lender called Curo Transatlantic. Curo has a loan book of nearly £10 million and 50,000 customers which is roughly a fifth of MCL’s current customer base.
It’s strategic, it actually transforms Morses online lending business with a much-enhanced decision engine, infrastructure, carefully selected customers, and all bought for a discount to book.
The company also announced a couple of acquisitions in its core home collect businesses, Eccles Savings and Loans, on 31st January, and Hays Credit, on 12th February. We characterise them as tactical in-fills as they add about 2% to core business.
Q2: You say Curo is a strategic deal, can you say more about what it does to build the group?
A2: MCL’s is very clear that strategic deals must accelerate an existing strategy, not wander off into uncharted waters. They’ve been building an online lending business and what this deal does is significantly accelerate the delivery of the strategy.
It’s buying all the existing infrastructure of Curo, including its decision making platform, which management says is a significant enhancement to the existing one. It’s buying a fully modernised call centre, including all the analytics, marketing and IT teams that’s taken Curo a number of years to actually build and it’s also, of course, it’s buying a loan book which gives immediate scale.
Q3: So, you’re expecting good profits in the second year but earnings dilution in year one, why is that?
A3: The sweet spot for Curo lending is actually 3-6 months and during the transition to MCL there’s been a period of about a month when no new lending was made, the website was down and they had to transfer the IT onto MCL’s platform etc. During that period, the book shrunk and with the duration of 3-6 months, not lending for a whole month actually makes a difference. Looking forward, we expect it to quickly rebuild, but that period of disruption will reduce this year’s earnings.
Q4: Mark, I thought Curo was bought out of administration, isn’t it very risky buying a failed business?
A4: Not when you understand exactly why it when into administration. Historically, Curo was very active in payday lending and it was mis-selling claims around this that that led it to go into. Now, Curo has not been doing payday lending for some years and all but a couple of the cases, of the 50,000 customers that MCL is buying, were actually made under the current affordability and compliance regulatory regimes. So, it’s totally different from the reason that Curo went into administration.
This business it’s buying is profitable and we also questioned management really hard on culture and they were saying that having been under the FCA’s intense scrutiny, Curo staff were, if anything, super-compliant, and there were no issues around things like the business being driven by customer-unfriendly sales targets or things like that.
MCL has a great reputation with the regulator and it values that highly and wouldn’t compromise it by buying a risky business.
Q5: Have you got anything to add on the in-fill deals?
A5: We think the Eccles deal is a perfect example of the opportunity where Morses Club can add value, it was a business that had no external debt but, as is often the case with family-run operations, had been in decline for some years. The debtor book is actually down a third in the past five years. Pressures from ever-increasing regulation, dis-economies of falling scale and the opportunity to crystallise value in a single transaction for a family business made it a very willing seller.
We believe that MCL is an attractive buyer for this type of business because it’s got a really stable business, it’s not seeing the disruption that a lot of other companies in this space are seeing. There are around 400 small home collect businesses in the UK and many have similar characteristics to Eccles and these deals.
