uk finance

I recently read some bullish commentary in regards to the proposed payday lending capping reforms which are likely to come in from 1 January 2013. A point was made that if the reforms get up, the likely impact may only be a temporary blimp on CCV’s profits. It might just put back profit growth by a year or two.

I note that the UK finance arm made a profit for the 2010-11 financial year before tax of $1,202,702. This is the first full year a profit has been made for the UK finance business. Considering that the first half of the 2010-11 financial year produced a loss of $270,751, there has effectively been a profit of $1,473,453 ($1.5M) for the second half of the financial year.

The loan book in the UK finished the financial year at 5 million pounds. At 31 December 2010, the loan book stood at 2.3 million pounds. As the roll out of financial services continues in the UK we can expect business to increase dramatically. The company believes that a similar rate of growth will occur for 2011-12 in UK financial services.

At the close of the 2010-11 financial year, there were 106 stores offering financial services in the UK. There are over 200 stores in the UK network and management are targeting 250 stores by mid 2012. There certainly is scope for growth in the next few years as the roll out marches on. I note that they are advertising online lending on their UK website for the first time.

Working on the most simplistic logic, while they are still in a start up phase in the UK, the loan book size should double each six months and profits should do likewise for the 2011-12 financial year. If you doubt that a loan book and profits could increase so quickly, go through a few of the old annual reports and see what has happened in Australia.

If my logic is correct, as at 31 December 2011, the loan book should be at 10 million pounds and profits of $3 million for the first half. Even in the unlikely event of no further growth in the loan book in the second half of the financial year, you would still be booking in a profit of $6 million for the full financial year for the UK finance arm. I believe it will be higher, however I have attempted to keep it simple and in doing so I am being conservative.

I personally believe that any loss in profits from the proposed legislation in Australia (if it gets up) will quickly be replaced by the UK arm of the business. The question in my mind is how the company is going to get the extra cash to increase its loan book size. I hope our friends at Ezcorp are still on side, they might be good for a loan. Cashies management are talking about diverting funds from Australia to the UK, there may be some logic in that strategy if the growth continues.

If you play the market with a long term approach like I do, you will be appreciating the buying opportunity we have at the moment with CCV. I would personally love to see them suspend their six monthly dividend payment and use the funds to finance their lending businesses. That would create a buying opportunity like none other as the share price gets smashed. I can only live in hope.