I am quite excited by the newest ASX fintech share, CML Group Ltd (ASX: CGR). The company recently acquired a software as a service (SaaS) website, Skippr. This platform allows CML to provide greater support to small business, one of its key verticals. It announced the acquisition on Tuesday 28 July. Consequently the CML Group share price rose by nearly 13% last week.
CML Group provides a range of debtor finance options for medium and small businesses. This type of finance implies short-term credit often secured by alternative assets to real estate. More specifically, it is a short-term solution to cashflow issues. The company provides three types of debtor finance; invoice finance, equipment finance, and trade finance.
The greatest revenue generator is invoice discounting, a loan against an invoice that has yet to be paid. I have personally used this type of service with a different provider when I owned a consulting company. Second, equipment finance, is a loan secured by both new and owned equipment. For instance, equipment finance is often something used to fund a management buy out. Third, trade finance, where the loan is used to pay for imports. Trade finance is the smallest revenue generator for CML Group.
Companies like CML Group are vital to the small business sector. In my opinion, these types of services help small companies become large companies and can be critical in growing an organisation.
The small business support platform
While the company provides various types of credit, it is the invoice finance that drives the lion’s share of revenue. Its SaaS platform has deep functionality and is able to integrate with Xero Limited (ASX: XRO), MYOB and a range of other commonly used software. Accordingly, the platform allows CML Group to work with its clients in a far more collaborative and integrated manner.
The acquisition of clients using manual processes is expensive and can be prohibitive for CML. For instance, the company has previously avoided clients with receivables less than $200,000 because the costs of onboarding reduced its profitability. However, with the automation provided by Skippr, it can now target smaller clients more cost effectively. The automated processes provide cost benefits in client acquisition, approval of invoices selected for funding, live payment monitoring and reconciliation, and sophisticated reporting for the end client.
One of the main benefits of the SaaS platform, aside from all of the cost benefits mentioned above, is that of customer engagement. As a platform designed to facilitate small business growth, it is likely clients would require the service multiple times over a period of years. Therefore, Skippr will enable CML Group to build long lasting relationships with its customers rather than simply meeting on-demand requirements.
CML Group has delivered year-on-year growth in invoices funded every year. As coronavirus restrictions have started to ease, the company has seen strong monthly growth. It financed a total of $1.7 billion in invoices through FY20, an increase of 6% despite the interruptions of bushfires and coronavirus. This should provide the company with an earnings before interest, taxes, depreciation and amortisation (EBITDA) of $19.5 – $20.5 million.
Over FY21, CML expects to see a high volume of business financing required. This is due to companies taking stock of the level of working capital they need on hand to best manage through the pandemic and return to full capacity. We are still seeing increased small business disruption and gradual decreases in government support.
CML Group is, in my view, a great company with a valuable product. Its service offering is suited to the times and will be a critical support mechanism for many small business owners as they strive to return to a steady state of trading. Moreover, the acquisition of the Skippr platform makes it the newest fintech on the ASX and I believe the CML share price will really start to go places over the next 12 months. At its current level, the CML share price pays a trailing, 12-month dividend yield of 6.96%.
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Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. 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 Scott Phillips.
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