Why the Cash Converters International Ltd share price is rebounding today

Cash Converters International Ltd (ASX: CCV) will pay $10.8 million to customers who were granted small amount credit contracts from its website between 1 July 2013 and 1 June 2016 under an Enforceable Undertaking (EU) agreement with ASIC. The company will also pay infringement notices of $1.35 million as part of the deal.

Cash Converters has already booked the charges in its 2016 accounts and so the EU will not affect this year’s profit although there will be a cash impact. The market responded well to the news with shares trading 7.6% higher earlier this afternoon.

Unfortunately, it does not seem like this will be the end of the company’s compliance woes. It is currently facing a class action from Queensland borrowers who took out cash advance loans during the period from 28 April 2010 to 30 June 2013.

In 2015, Cash Converters settled another class action for $20 million relating to lending to New South Wales customers over the same period.

Peer Money3 Corporation Limited (ASX: MNY) has so far avoided such regulatory issues and announced its planned exit from the unsecured small amount credit contract business in 2015. The company has fared well in recent times recording 20.2% earnings-per-share (EPS) growth in 2016 and 142.1% over the last five years.

In 2016, Money3 recorded EPS of 14.2 cents placing it on a price-to-earnings ratio (PER) of 11.5 compared to just 6.6 for Cash Converters based on continuing operations.

Whilst Cash Converters is justifiably cheaper than Money3, neither looks expensive at today’s prices. Personally, I tend to avoid lenders for the simple reason that it is difficult to judge the quality of their lending practices.

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Motley Fool contributor Matt Brazier has no position in any stocks mentioned. 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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