FSA Group Ltd (FSA)

Written by Nigel Littlewood...

A couple of months ago I wrote an introductory piece on a small cap that I have a material investment in called FSA Group.

Since then, FSA has released its 2013 annual results and subsequently, the re-rating that has been going on for some time, has continued with the stock reaching $1.09 recently up from 75c when I mentioned it a few months back.

Lets consider the result:

At $1.09 the stock is capitalised at $137m (with excess cash of around $10m). For the year ending June 2013 FSA reported as follows:

Rev      $64m                                                  up 9%

PBT     $17.8m                                               up 19%

NPAT  $10.8m                                               up 26%

EPS     8.51c                                                   up 36%

Net cash inflow from op       $14m              up 49%

Dividends (full year)                        5c                    up 127%

The result was a little better than I had anticipated and the dividend was a full 1c higher than I expected for the full year too.

The post result commentary has highlighted the company’s intention to try and grow both loan books (mortgages and factoring) in the next couple of years and maintain existing profitability in the services division.  This strategy should provide further earnings growth and based upon the recently announced new banking terms with Westpac, this growth will be self funding and wont require further capital.

While the stock is now trading above $1, a healthy move since I first mentioned it at 75c, it’s far from expensive. On the basis that we see a 10% improvement in earnings to around $12m this year, the stock is trading around 10.5x (if we back out the current $10m cash to provide an adjusted cap of $127m at $1.09) and its cashflow multiple is even lower (circa 8.5x based on c/f of $15m) providing an operating cash flow yield of about 12%. I expect the dividend to get bumped again and 6c ($7.5m) is a reasonable expectation providing a fully franked yield of 5.5% at $1.09. The company maintains a high level of franking credits and could pay out a special dividend too but I’m not banking on that.

SUMMARY

All in all, a respectable result and FSA is seeing real institutional shareholder interest for the first time, which is helping to re-rate the stock. I can see further upside.

Editors Note: Please be aware that Nigel Littlewood is not authorised to provide financial advice. The views expressed are his only. Please also note that Kristian Dibble also owns FSA.