I, too, am pleased with the overall result, particularly with 1)...

I, too, am pleased with the overall result, particularly with 1) the fact that FY2021 NPAT has exceeded the top end of the previous guidance range (20.1m$ delivered vis-a-vis 17.9m$-19.6m$ guidance), and 2) H2 2021 NPBT being higher than pcp by +1.9m$ (+16.9%) after adjusting for Job Keeper payments.

It should also be noted that the slowdown in Services, and to a lesser extent in Consumer Lending, has been accompanied by an increase in the amount of surplus cash generated, with Net Cash held at the corporate level increasing from 12.7m$ as of Dec 2020 to 18.6m$ as of Jun 2021, despite 7.5m$ having been paid out in dividends.

Simply annualising the H2 NPAT of 9.3m$ and adjusting for the 18.6m$ in Net Cash, the stock is currently valued at a cash-adjusted PE of (125m*1.11$-18.6m$)/(9.3m$*2) = 6.4x, which looks decidedly cheap.

The main question, though, is what level the earnings from the Services division are going to bottom at before resuming growth. Looking at the past two financial years, Fees from Services as a Percentage of the average debt managed during the period have been roughly constant around 5.8% per semester; if one takes the current level of debt managed (209m$) and keeps that 5.8% ratio unchanged, the current run rate of Fees from Services turns out to be 209m$*5.8%*2 = 24.2m$.

All else being equal (i.e. without assuming any further reduction in costs for the Services division), that would reduce FSA’s NPBT run rate by -4.6m$, i.e. from 26.6m$ to 22.0m$; in NPAT terms, that would equate to 22.0m$*(1-30%) = 15.4m$ pa (at a 30% tax rate). So, relative to this run rate, the current cash-adjusted PE would be (125m*1.11$-18.6m$)/15.4m$ = 7.7x, which still looks pretty cheap.

If one then assumes that the amount of debt managed will shrink further to 150m$ (which, for context, would represent a -62% drop relative to June 2019 levels), annual Fees from Services would fall further to 150m$*5.8%*2 = 17.4m$; in NPAT terms, and again assuming all else being equal, that would give 15.2m$*(1-30%) = 10.6m$ pa. Note that, without assuming any further reduction in costs, this would essentially equate to assuming zero NPAT contribution from the Services division. Relative to this stress scenario, the current cash-adjusted PE would be (125m*1.11$-18.6m$)/10.6m$ = 11.2x.

So, while it should be kept in mind that the re-building of the Services book is going to involve upfront costs that will only subsequently generate annuity-type fee revenues, the way I look at FSA now is that a buyer at today’s price is basically paying a fair multiple for the Consumer Lending business and getting the Services business for free.

My view is that the Services business (which by way of reminder consists of Personal Insolvency Arrangements, Bankruptcy advisory, etc.) will prove a lot more valuable than that once the one-off impact of Government support is fully absorbed; I also believe that, under a prudent and shareholder-aligned Management, the Consumer Lending business has still plenty of room for growth.

While this is not the type of business I would ever invest heavily into, given its illiquid micro-cap nature and the “black-box” characteristics inherent to consumer lending, I personally think there is a lot to like about FSA, at its current price and at the present stage of the economic cycle. Thus, I am happy with it representing just over 1.5% of my NAV as of today, and will contemplate adding further on any price weakness.

As always, DYOR and all the usual caveats.