The shares of Cash Converters International Ltd (ASX: CCV) have taken a dive today after the company responded to an announcement from the Minister for Revenue and Financial Services yesterday. At the time of writing its shares are down almost 7% to 32.2 cents.
In his announcement the Hon Kelly O’Dwyer MP indicated that the Turnbull government supports all the recommendations of the Small Amount Credit Contracts (SACC) Law Review.
At present the cap on the total amount of all SACC repayments stands at 20% of the customer’s gross income, but the government plans to lower this cap to 10% of the customer’s after tax income.
Cash Converters has responded today by stating that it is “disappointed with the government’s decision” and does not believe the change will prove helpful to consumers.
By lowering the amount that a customer can repay each month, the average tenure of a loan will have to be extended. Whilst the repayments may be more comfortable, the longer term loans will incur more monthly fees.
According to the release: “This change will impact around 500,000 Cash Converters customers who access our short term Cash Advances (six-week loans). To address their need for credit and meet the new cap, these customers would now be required to take out 12-week loans, resulting in more monthly fees and a restriction of consumer choice.”
It is worth remembering that any change to regulations wouldn’t come into force until at least 12 months after legislation passes through parliament.
Whilst it may prove to be a stumbling block for the company in the future, for now it is business as usual for Cash Converters. Management reiterated its full year net profit guidance to be in the range of $20 million to $23 million, following a $5.3 million loss in FY 2016.
Today’s decline does make Cash Converters a tempting investment, especially with guidance reaffirmed. But ultimately its future will depend on how its business reacts to changes in legislation. So for now it might be best to stay clear of the company, at least until legislation is finalised.
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Motley Fool contributor James Mickleboro 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.