Why the Cash Converters International Ltd share price is soaring today

Shares in consumer finance provider Cash Converters International Ltd (ASX: CCV) rose by more than 3% on the ASX this morning.

The Cash Converters share price flatlined more than six months ago and currently trades at around half what it was worth this time last year.

Why did this happen to Cash Converters shares?

This morning, Cash Converters reported strong performance across all of its Australian businesses for the six months ending 31 December 2015. Revenue grew by nearly 6% to just shy of $200 million, which helped drive net profit of $15.9 million in the period. That’s a great turnaround from the $5.3 million loss Cash Converters made in the same period one year earlier.

More importantly, Cash Converters confirmed a change of strategy which will see the group step back from its ill-fated punt on the UK market. Cash Converters will divest its UK personal loan book and plans to sell its corporate stores to franchisees within its network. The group will also close its Australian motor vehicle finance arm, Carboodle.

Cash Converters will focus on the business for which most people know it best — its Australian online and physical retail and financial services division. Cash Converters benefits from strong brand recognition and customer satisfaction levels among Aussies, and it enjoys a leading domestic market share.

After a tough year for payday lenders, which saw a regulatory inquiry and a pullback from funding by Westpac Banking Corp (ASX: WBC), it makes sense for Cash Converters to focus on its most promising businesses. As Cash Converters called time on its push into the UK, investors cheered the strategic move — bidding up the company’s share price this morning.

What’s next for Cash Converters International Ltd?

Managing director Peter Cumins spoke positively about Cash Converters’ prospects today. He said:

We will now focus on markets where we already have a strong position, good growth prospects and relatively predicable operating and regulatory environments…recent government data shows the short-term lending market in Australia is growing and the range of consumers accessing these products is broadening. This is driving demand for online and more sophisticated lending products. Cash Converters is well positioned to meet this demand and respond to industry changes.’

Mr Cumins has put his money where his mouth is, declaring a two cent per share interim dividend. With the stock having sold off significantly over the past three years, it’s possible that today’s price action has put something of a floor under the Cash Converters share price.

Foolish takeaway

Payday lenders can be a dicey business at the best of times. It’s not the kind of investment most people would like to advertise at dinner parties.

Recently, Cash Converters and its peers Thorn Group Ltd (ASX: TGA) and Money3 Corporation Limited (ASX: MNY) have been particularly on the nose, as the government has targeted the sector. But these companies provide services that a lot of people depend on, and its demand dynamics look relatively assured.

The conclusion of Cash Converters’ strategic review could mark a wise time to consider an investment.

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Motley Fool contributor Tim Dohrmann has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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