The stock market greeted today’s half-year results report from Morses Club (LSE: MCL) by moving the share price down more than 7% as I write. Ouch! And that means the stock has travelled in excess of 40% lower over the past seven months.
I think it’s safe to say the UK-focused, home-collected credit lender is out of favour with investors. Indeed, with the share price close to 107p, the forward-looking earnings multiple for the trading year to February 2021 sits just below seven, and the anticipated dividend yield is a little under 9%.
A double whammy for the shares
A couple of things strike me as potentially driving the price falls in this stock. One is that it’s known the Woodford funds have been offloading the shares recently as part of their drive for investments in bigger firms with greater liquidity. Another is that Morses Club’s business is in a state of flux, albeit remaining profitable now.
The firm has a three-year business plan aimed at continuing its drive to generate growth organically and via acquisitions. And the strategy also involves diversifying operations to embrace online methods of acquiring trade. Meanwhile, the core home-collected credit (HCC) business is performing well.
We could read the figures from two recent acquisitions in a negative light. CURO Transatlantic and U Holdings both target the digital market and both “had financial challenges” when Morses Club purchased them. And they’ve contributed losses rather than profits over the reporting period.
Morses Club bought CURO Transatlantic while it was in administration and U Holdings needed “significant” investment. The directors said in today’s report that the turnaround and integration of the two businesses is “complex” even though “significant” progress has been made.
But I reckon buying stressed firms at low valuations is a decent growth strategy. The alternative of buying perky businesses at high valuations strikes me as risky, and it’s often a good idea for companies to look for expansion opportunities when markets or economies turn down. In this case, Morses Club sees the two acquisitions as helping to create a “foundation for further expansion into the digital arena for the business.”
Integration dragging on the results
In the first six months of the trading year to 31 August, the net loan book rose just over 6% compared to the equivalent period the year before, and adjusted profit before tax in the HCC division went up by just over 20%, which reveals the strength of the core business.
However, adjusted overall profit before tax slipped back just under 9% because of the offsetting effect of the costs and losses involving the integration of the new digital businesses.
The directors made a balanced assessment of the situation by keeping the interim dividend flat. But I think if we are leading into a weaker macro-economic environment, demand for the firm’s alternative credit offering could increase.
I reckon there’s every chance the company will be successful with its plans to integrate the new digital businesses. The current low valuation and high dividend yield look attractive to me, and I’d be inclined to buy some of the company’s shares before Brexit.
