The 4 October results confirmed steady growth, controlled risk and delivery in line
with expectations. Double-digit underlying revenue and earnings growth was
generated from stable customer numbers, and achieved more efficiently with
fewer agents. The Provident Financial opportunity is now embedded and
management can focus on new growth initiatives. We reviewed MCL’s focus on
quality in our 19 July 2018 note, Quality Street, highlighting how conservatism runs
throughout MCL’s lending, accounting, agents, customer selection and new
product development. Our absolute valuation range is now 179p to 223p.
► 1HFY’19 results: We believe investors should focus on like-for-like KPIs, not
the statutory accounting numbers. On an LFL basis, revenue was up 12%, the
net loan book +8%, adjusted PBT +14%, and adjusted EPS +14%. The cost
income ratio improved from 59.6% to 58.5%. Impairments were 21.9% of
revenue (21.6%).
► Outlook: We have made only modest (upward) revisions to estimates. With the
former Provident Financial agents, managers and customers significantly
embedded, management can now focus on expanding new product areas
(online loans, the customer portal, and Morses Club Card), and home collect
acquisitions.
► 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 now 179p to 223p. Peer measures range from 144p to 201p.
► 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 company to receive full FCA authorisation.
► Investment summary: Morses Club is operating in an attractive market, and it has a
dual-fold strategy that should deliver an 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 5.3% February 2019 dividend yield, with cover of 1.7x (adj. earnings).
