The latest profit results from consumer financing group FlexiGroup Limited (ASX: FXL) proves that our love affair with debt continues to burn with a passion with the stock surging ahead as it delivered a strong set of numbers and issued a bullish outlook.
The share price of FlexigGroup rallied 21.8% to $2.21 during lunch time trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index tumbled 0.8% with mining giant BHP Billiton Limited (ASX: BHP) and financial heavyweight Westpac Banking Corp (ASX: WBC) leading the declines.
But there’s no gloom surrounding FlexiGroup and I think it’s only a matter of time before the stock re-tested its 52-week high of $2.32.
While FlexiGroup posted a 5% drop in cash net profit to $88.2 million for the year ended June 30, 2018, the figure was at the top end of its guidance and it included $2.5 million in restructuring costs.
Encouragingly, transaction volumes jumped 17% to $2.3 billion as the number of retailers on its network increased 8% and the total number of consumers increased 5% to just over one million.
Despite the positive results, management has elected to hold the dividend steady at 7.7 cents for the year as it played down debt by $22 million to cut its gearing to 36% from 53% in the previous corresponding period.
But there’s every chance that dividends could be upped in the current financial year with management forecasting a cash net profit of between $95 million and $100 million, which would equate to an 8% to 13% increase over FY18.
The key growth drivers in the business are its Certegy product that allows consumers to buy goods on instalments and its AU Cards business, which holds the Mastercard Skye Card.
FlexiGroup isn’t the only consumer financing business that is going gangbusters. There are also high expectations for Afterpay Touch Group Ltd (ASX: APT) as its share price rallied to a fresh record high of $17.94 ahead of its profit results.
The success of these companies stand in contrast to a number of retailers like JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) who are struggling to generate meaningful growth.
This shows that consumers are still happy to open their wallets, it’s just that they want to shop a different way and would prefer to use financing deals to overcome weak wages growth.
I don’t think this thematic is likely to change and that means investors looking for exposure to retail should be more focused on the likes of FlexiGroup and Afterpay than on traditional brick and mortar retailers that are more directly impacted by online only rivals like Kogan.com Ltd (ASX: KGN) and Amazon.com.
But FlexiGroup isn’t the only small cap stock that is well placed to outperform. The experts at the Motley Fool are also tipping this emerging stock to deliver big in FY19.
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Returns as of 6th October 2020
Motley Fool contributor Brendon Lau owns shares of AFTERPAY T FPO, BHP Billiton Limited, and Westpac Banking. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended FlexiGroup Limited and Kogan.com ltd. 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 Scott Phillips.
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