How Cash Converters aims to build on a +$16m NPAT turnaround

Second-hand retail and personal finance business Cash Converters says it will look to build on its momentum after posting a net profit turnaround of more than $16 million in FY21.

Cash Converters (ASX:CCV), which in FY20 reported a net after-tax loss of $10.5 million, today announced a remarkable net profit after tax of $16.2 million for FY21 – a significant result in the face of a challenging and quickly-moving economic environment.

Earnings before interest, tax, depreciation and amortisation were up 136% year-on-year for for Cashies at $45.3 million, despite revenue dropping 23% to $201.3 million.

The year proved transformative for the company, according to managing director Sam Budiselik, who said Cash Converters had been impacted by the pandemic but was able to perform on the back of strong planning and sound digital investment.

“COVID made things really interesting for the business in the early parts of the financial year,” he told Stockhead.

“In our short-term lending business, a lot of the government stimulus that flowed through quite sensibly hit our customer segment – some of those customers prudently used the stimulus to pay off loans, so the loan books contracted.

“At the same time, our retail inventory got sold – we ran from $30 million of inventory down to sub-$10 million, we didn’t have much left in the stores for a while there.”

The contraction in revenue – though somewhat offset by the strength of the reported EBITDA – was attributed to the shrinking of the loan book over the early part of the financial year, with a low in September before a significant recovery.

By year-end, the gross loan book had increased 8% on FY20 numbers to $178.1 million. The company’s loan facility was only drawn to 46.8%, allowing significant headroom for growth.

Meanwhile with some parts of Australia locked down for more than 100 days over the period, retail was bolstered by the Cash Converters’ online presence – an area of significant investment in recent years – with online sales up 14% on the previous year.

The company also reported 97,000 registered customers on its personal finance app, My Loans.

“I think the way we positioned the business to continue growing out of the COVID crunch is really starting to yield some strong earnings momentum now,” Budiselik said.

“That really came out in the second-half build out of loan books, continuing now into FY22. So that’s how we’re looking at the profile in terms of the recovery.

“Even with a bit of a washing machine of a year, in terms of store closures and all the interruptions we encountered, Cash Converters was able to post really strong results.”

Personal finance contributed 53% of overall EBITDA last financial year at $38.6 million. Retail stores came in at $13.8 million (19%), vehicle finance at $11.7 million (16%) and franchising, which covers 618 stores around the world, at $8.4 million (12%).

The company will issue its shareholders a 1c per share fully franked final dividend, taking overall dividends for the financial year to 2c per share.

Finance focus shifting

The advent of buy-now-pay-later market players had led Cash Converters to rethink its lending model, deliberately steering away from the crowded Small Amount Credit Contract (SACC) space towards Medium Amount Credit Contracts.

SACC loans are those worth up to $2000, with a contract length of between 16 days and a year. MACC loan contracts apply over the same time period but cover loans worth between $2001 and $5000.

Cash Converters reported a 56% year-on-year increase in its MACC loan book to $49.4 million. SACC loans were up 7% – stable by comparison.

Cash Converters plans to leverage 37 years of customer data as it continues its move away from short-term, high-loss, high-cost credit towards innovative products better suited to its core markets.

“We have 37 years of history here, and while it’s a very different business moving online to what it used to be, there is more than a million customer records and half a million active customers moving through the business – it gives us great insight into what’s happening in that part of the economy,” Budiselik said.

“By leveraging those insights and analytics, we’re driving our new product development and growth channels.”

Budiselik, whose background is in investment banking including stints at UBS and Barclays in London, said the analytics at Cash Converters’ disposal were beyond anything he’d had exposure to previously.

“The platform here is just unreal and a really interesting developing story,” he said.

On the back of it, Cash Converters has plans for an early wage access product with a fixed fee of 5% per arrangement to be released in the current financial year, and will also look to release longer-term, lower-cost products.

Meanwhile, the company’s wholly-owned Green Light Auto motor vehicle finance business saw a year-on-year gross loan book decline of -28%, attributed to COVID impacts in the first part of the year, though a new online portal was released which integrates bank statement providers and credit agencies to allow real time rate offers.

“Demand for vehicle lending exceeded more than $4 million per month in applications towards the end of the financial year and we are confident our new product development and risk scorecards will result in continued, measured growth,” Cash Converters said in its release to the ASX today.