The stock of Cash Converters International Limited (ASX: CCV) by the end of the trading session, was at A$0.140, down by 6.667% or 0.010, from the previous close, on 29 July 2019. In an announcement dated 29 July 2019, the company reported an update for the year ended 30 June 2019 FY19.
Accordingly, the communication to exchange acknowledges the fact that the asset quality has been deteriorated, resulting in bad debt in the auto loan & personal loan segments, despite the growth in revenues. Besides, the company has posted revenue growth of over 8% in the FY2019 backed by the increases in pawnbroking interest, retail sales and demand for financial service products.
It was also mentioned that the deteriorated asset quality in the auto loan & personal loan segments has resulted in reduced profitability, and the management conducted a review of the credit scorecards during the second half of the year, subsequently the approval criteria have been tightened.
Reportedly, the company expects to report a statutory net loss after tax in the range of $2 million to $4 million, which could be down from $22.5 million profit in the FY18. Also, the company has incorporated a number of adjustments, which led to the expectation of the Net Loss After Tax for FY19.
Adjustment Reconciliation (Source: Company’s Announcement)
Amortisation, Depreciation & Write-Offs
It was mentioned that the existing dynamic technological environment led to a comprehensive review of the assets on the balance sheet and related software, which has concluded that the existing useful life was not appropriate. Therefore, the useful life of the software was determined to be no longer than 5 years, and the impact was reported at $3.5 million.
Admittedly, the company has also written-off an investment in a third-party loan management software (UK IT Project), which was being developed for the UK business. Besides, an alternative solution was selected by the company, and the written-off amount was reported at $1.6 million.
Credit Risk Review
Cash Converter had appointed external consultants to undertake reviews of the unsecured SACC & MACC personal finance loan books and the secured GLA loan books. Consequently, it would be writing-off some bad debts leading to an increase in bad debts expense for the year. Admittedly, the company has also deployed enhancement to its credit risk analytics for SACC & MACC decisioning, and credit scorecard for Green Light Auto was reviewed and improved, which led to the tightened credit criteria for the approvals across all products. The company expects adjustment for approximately $5 million for this course.
Restructuring & Other Costs
The company reported the restructuring costs to be $1.4 million, which includes $0.3 million incurred in the second half of the year. Also, $1.1 million of the restructuring costs were disclosed in the first half of the year. Cash Converters also expects other costs to be $0.5 million, which includes the increase in provisioning for inventory, unredeemed pawnbroking contracts and the reversal of unvested LTI share options.
Class Action Settlement
Cash Converters had previously disclosed the settlement for McKenzie class action, which was paid during November 2018 for $16.4 million. Besides, the proceeding for Lynch trial continued in November 2019, and the outcome is not yet known. Consequently, the company incurred legal fees related to the defence of trials, and the total spending for the year was $3.2 million, an additional $0.7 million was incurred during the second half of the year.
Key Personnel Statement Excerpts
Brandon White, CEO of Cash Converters, stated that since his arrival in March this year, he had met many colleagues, customers and conducted the business operations reviews. Besides, the position of the company with over 750k active customers across business gives a unique stature. He mentioned the strong Net Promoter Score, and the company would focus on delivering the customer experience that could exceed expectations.
Also, the company intends to continue with the momentum in revenues and operational efficiencies underpinned by the technology platform, digital channels and extensive store network, which would deliver the shareholder value in the upcoming years. He concluded that the market would be updated regarding the emerging business strategy during the full year audited results, scheduled on 28 August 2019.
Half-Year FY19 Recap
On 21 February 2019, the company released the half – year results for the period ended 31 December 2018. Accordingly, the company had reported Net Loss After Tax of ~$5.2 million in the H1 FY19 against NPAT of $9.4 million in H1 FY18, H1 FY19 included the settlement of McKenzie class action at $16.4 million. Also, the revenues of the company stood at $137.3 million up by 11.6% over H1 FY18, and the total loan book increased by 22% to $210.3 million as on 31 December 2018 from 30 June 2018. Besides, the loan book of the company includes Medium Amount Credit Contract (MACC), Small Amount Credit Contract (SACC), Green Light Auto (GLA) and Pawnbroking loan book.
Reportedly, the Medium Amount Credit Contract (MACC) grew by 23.4% to $42 million as at 31 December 2018 against the number on 30 June 2019. Also, the Small Amount Credit Contract (SACC) loan book grew to $93.1 million or 15.9% as of 31 December 2018 against the number on 30 June 2019. Besides, the Green Light Auto (GLA) grew by 38.2% to ~$58.1 million as at 31 December 2018 against 30 June 2019. Further, the pawnbroking loan book increased by 7.3% to $11.4 million as of 31 December 2018 against the numbers on 30 June 2019. It was reported that the bad and doubtful debts increased due to the growth prevailed in SACC loan book, and implementation of AASB 9 also added some impact.
The market capitalisation of the stock stands at ~A$92.47 million, with approximately 616.44 million shares outstanding. The performance of the stock over the past one year has been -55.22%. Also, over the period of past one month and year-to-date, the return of the stock has been -6.25% and -37.50%, respectively.
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