Quality Street

We have repeatedly asserted that providers of Home Collect Credit (HCC) need to understand their customers’ thinking in order to lend profitably. Equally, to properly appreciate the risks and rewards that the HCC companies offer investors, we need to understand their corporate culture. In this note, we review MCL’s focus on quality, giving practical examples of how the group aims to generate sustainable profit growth. Conservatism runs throughout MCL’s lending, accounting, agents, customer selection and new product development. We have not changed our steady growth forecasts, and our valuation range remains 171p to 197p.

• Focus on quality: 70% of customers are now “high-quality” (58% three years ago). MCL was very selective in securing experienced agents and recruiting field managers to optimise the opportunity from the market leader’s self-inflicted woes. Online lending start-up losses are a fraction of peers’ establishment costs.
• Impact: Investors may expect good, sustainable growth for the period 2017-19. The focus on quality may also mitigate regulatory risk, requires modest funding and should carry much less macroeconomic downside risk. Investors wanting high growth but potentially volatile returns should look elsewhere.
• Valuation: We detailed a range of valuation approaches and sensitivities in our note, Bringing home collect into the 21st century (2nd Feb 2017), and in our FY18 Results note (16th May 2018), and we do so again in this report. Our absolute methodologies generate a valuation range of 171p to 197p.
• Risks: Credit risk is high, but MCL adopts the right approach to affordability and credit assessment. Regulatory risk is a factor, but consistently high customer satisfaction suggests a limited need for change. MCL was the first major HCC company to get full FCA authorisation. Funding risk is modest.
• 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 agent network is the competitive advantage over remote lenders. We forecast a 4.6% February 2019 dividend yield, with cover of 1.6x (adj. earnings), and a valuation range of 171p to 197p.