Today Flexigroup (ASX: FXL) has bought ThinkSmart's (ASX: TSM) Australian and New Zealand business. The acquisition is to be funded by a combination of cash and debt facilities and is expected to be cash earnings per share (EPS) accretive as of FY2015.
In this year's Hong Kong-based Asia Money awards, Flexigroup was rated the best medium-cap company. These awards, in each major regional country, are for standout companies with executives who have strong management skills.
At the awards Flexigroup was lauded for the 2012 strategic acquisition of Lombard Finance (credit card and interest free) and the 2013 Once Credit purchase personal finance products, including in-store finance or a Visa card). Other services are provided via Certegy (no interest ever and lay-by), Flexirent (lease) and FlexiCommercial (vendor leasing programs).
In summary, Flexigroup is a diversified financial services group that operates in Australia, New Zealand and Ireland within a diverse range of industries including home improvement, solar energy, fitness, IT, electrical appliance, navigation systems, trade equipment and point of sale systems.
A distinct advantage of Flexigroup's business model is the embedded nature of its finance products with retailers, OEMs and distributors. The Certegy division have long term agreements with key retailers such as Super Retail Group (ASX: SUL). While still relatively early days for Lombard and Once, the signing of Dick Smith (ASX: DSH) as a distribution partner bodes well.
In terms of the provision of leasing options to consumers, Flexigroup competes with Silver Chef (ASX: SIV), Thorn Group (ASX: TGA), Cash Converters (ASX: CCV) and ThinkSmart.
In today's market it is increasingly rare for a company to provide guidance. Upon its most recent profit announcement, the company revealed three measures that it sees as vital to its fortunes. It forecast cash NPAT as increasing by 18%, the growth in receivables to be 25% and the sales that drive those receivables were forecast to increase by 16%.
Why invest now?
Upon that same FY2013 profit release, broker Bell Potter was very positive on Flexigroup's prospects when the shares were trading at $4.66 ($4.11 open today). It stated that opportunistic acquisitions are more likely to be the positive share price catalyst (rather than a multiple re-rating) over the medium term.
While the stock had re-rated to a market premium valuation at the time, it argued that earnings quality was higher than it has ever been, given diversity by product line and new initiatives such as credit cards.
Foolish takeaway
In my opinion, it is an opportune time to invest in Flexigroup for investors with a medium- and long-term horizon because the stock is at a relatively low price and today's acquisition is a catalyst for a potential re-rating.
As indicated by ongoing conservative profit guidance, which is generally exceeded, there is a greater element of certainty with earnings than most companies. Some caution should be applied if you think a downturn in the economy is looming, which could cause a fall off in sales and bad debts would increase.
It should be noted that management is clear that they are focused on growth and dividends (currently 3.5%) are a secondary consideration.
