Morses Club (LON:MCL) recent results (see our 21 October note, Interim FY’20 results: steady core, deal upside) highlighted the strength of Home Collect (HCC). The division showed operational efficiency improvements, the appropriate use of technology and improving credit. It also generated double-digit underlying profit growth, despite a stable market and without compromising the agent-driven model. In this note, we explore MCL’s strategy to expand from this strong core business. The strategy is driven by extensive customer surveys, and could see a doubling in both the number of customers and the share of wallet over the medium term. Investment is being paced to balance short- and long-term profitability.
- Strategy: Over many years, MCL has surveyed its customers to find out what products they want and how they want them delivered. From this, MCL has identified opportunities to retain more customers, acquire new ones and target 59% of the customer wallet against a current proposition that serves 27%.
- Outlook: MCL has stretching targets for the online lending business, with guidance of pre-tax, pre-interest profits in the range of £2m-£4m for FY’22 (likely pre-tax £1m-£2m). The current account business opportunities are incremental to this. Both acquisitions require integration, which is the FY’20 primary focus.
- Valuation: We detailed our valuation approaches and sensitivities in our initiation note of 2 February 2017, Bringing home collect into the 21st century. The range in absolute valuation methodologies is now 167p to 197p (unchanged). Superior medium-term growth from new businesses provides further upside potential.
- 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. It conservatively manages risk and compliance, especially in new areas. The self-employed agent network is a competitive advantage in credit management. The valuation appears an anomaly. We forecast a 6.3% FY’20 dividend yield, with cover of 1.6x (adjusted earnings).
