Interim FY’20 results: steady core, deal upside

MCL’s core HCC division once again delivered a strong performance. Market volumes remain subdued, but 11% underlying profit growth has been delivered, with efficiency gains and good credit (20% reported adjusted growth). The acquired businesses’ performances required incremental investment, and initial lending appears slightly behind track, but these issues are short-term and management has reiterated its stretching guidance for FY’20 and FY’21. We also note the cash collected from CTL loans at acquisition is £11m, against an £8m consideration. Looking forward, management has outlined a clear, customer-demand-driven strategy in its area of competitive advantage.

• 1HFY’20 results: HCC revenue was up 4%, despite credit issued and loan books being flat. Efficiency improved, as did impairment to revenue. HCC’s adjusted PBT was up 20% (11% excluding an extra week of trading). The digital business saw adjusted pre-tax losses of £3.5m (statutory £5m), with heavy investment.
• Outlook: The management outlook statement was for trading in line with expectations, and we do not expect material changes in consensus numbers. Importantly, the stretching targets for the online business have been reiterated, with guidance of pre-tax, pre-interest profits in the range of £3m-£5m for FY’21
• Valuation: We detailed a range of valuation approaches and sensitivities in our initiation note, Bringing home collect into the 21st century, published on 2 February 2017. The range in absolute valuation methodologies is now 167p to 197p (previously 176.5p to 224.5p). We have adjusted our above-consensus estimates.
• Risks: Credit risk is high (albeit inflated by accounting rules), but MCL adopts the right approach to affordability and credit assessment. Regulatory risk is a factor, although high customer satisfaction suggests a limited need for change. MCL was the first major HCC company to receive full FCA authorisation.
• Investment summary: MCL is operating in an attractive market, and it has a dual-fold strategy that should deliver an improved performance from existing businesses and new growth options. It conservatively manages risk and compliance, especially in new areas. The self-employed agent network is the competitive advantage over remote lenders. The valuation appears an anomaly. We forecast a 7.1% FY’20 dividend yield, with cover of 1.6x (adjusted earnings).