COMMENT
Make Money From 30% Loans

By Ed Bowsher (TMFArkle)
January 24, 2006

Shares in Homebuy (LSE: HBG) have soared 180% since the hire purchase company first listed in summer 2004. However, the company is growing fast so there could be further share price gains to come.

Just look at these numbers. Earnings are expected to rise 30% in 2007, yet the company is trading on a price/earnings ratio of 9 for this year, falling to 7 in 2007. That puts Homebuy on a PEG ratio of just 0.23!

Homebuy's business is selling TVs and other appliances to low-income households. The buyer pays for the goods by entering into a three year hire purchase plan. As a result, Homebuy makes a profit on the sale of the goods, and also receives interest (29.9%) on the hire purchase loan.

A meter is attached to the TV, and if the buyer wishes to watch TV, he/she has to put coins in the box. The meter is normally set to provide four hours of viewing for £1 on a standard TV/VCR package.

Most of Homebuy's customers watch a lot of TV, so the meters often contain more coins at the end of the month than are required to pay the latest instalment. Any excess coins are usually handed back to the customer.

The beauty of this business model is that bad debts are fairly low because customers have to pay for their TV as they go along. What's more, Homebuy shouldn't suffer hugely in a recession as many of its customers are already unemployed.

Homebuy also sells other appliances such as cookers and microwaves. All the payments for these other goods are made via the meter on the TV.

The company announced spectacular interim results last November in which turnover almost doubled to £28m while operating profit soared 390% to £7.4m. The operating margin increased from 14% to 21%. Much of the sales growth came from the acquisition of a business called Telebank, although Homebuy also grew organic sales by 17.9% during the period.

Like Homebuy, Telebank supplies TVs to low-income households with a meter on the set. However, Telebank traditionally hasn't sold appliances -- it's rented out second hand ones instead.

Homebuy is now converting the Telebank customer base from "rent old" to "buy new." The customer benefits from this change as they get an up-to-date TV, which they should own outright after three years.

So are there any potential downsides?

Well, some Fools may not wish to invest in a business that lends at a 29.9% interest rate!

What's more, acquisitive, fast growing companies can hit problems, and it's possible that Homebuy will prove to be less resilient to a retail downturn than I expect. Were that to happen, the company's high level of debt could leave Homebuy a little vulnerable. Interest cover in October was 4.3, which is on the low side.

Still, given what Homebuy has achieved so far, there's a strong chance that it will be able to pay down its debt in the years to come. The shares look attractive to me.

Regular readers of the Paulypilot's Pub discussion board have known about Homebuy since last May when one poster, kimboy 100, first highlighted the share. Homebuy has also been discussed on our AIM Companies Board.

More: Homebuy website