Tuesday, May 29th, 2018
One doesn’t have to look too far to see the challenges being faced by some of Australia’s largest listed institutions, many of which have been exposed in recent times by the Royal Commission. This in turn has delivered investors in the likes of AMP and the big banks some underwhelming returns recently. As a result, many investors are now looking beyond the traditional blue chips for a sound mix of sustainable growth and income.
One such opportunity is AxsessToday (ASX: AXL), a specialist provider of equipment funding solutions for SMEs across Australia. AXL provides its equipment finance products to SMEs at the retail point-of-sale, with most loans originated through trusted, accredited equipment retailers in real-time through a streamlined online portal. In effect, AXL allows its customers, who operate primarily in the hospitality and transport sectors, to purchase business critical equipment without needing to outlay 100 per cent of the capital upfront.
AXL’s business model meets neatly at the cross section of traditional finance and innovative technology. Management has invested heavily in its proprietary technology platform over the past five years, an investment that is now starting to pay meaningful dividends.
Disruption Often Brings Opportunity: The Competitive Landscape is Shifting
As introduced above, the Royal Commission has become quite the headwind for many established businesses operating across the Australian financial sector. As is often the case, industry disruption often brings with it opportunity. With the big banks particularly pulling back from directly engaging in the funding of SMEs in Australia, nimbler operators such as AXL are provided with substantial opportunity to drive market share growth.
As disclosed in AXL’s prospectus, Axsesstoday’s competitors include a wide range of bank and non-bank finance providers, including:
- Silver Chef Limited (ASX: SIV) which provides equipment finance to the hospitality, transport and other sectors;
- Flexigroup Limited (ASX: FXL) and Thorn Group Limited (ASX: TGA); and
- Major banks, regional banks and international banks
With an offering that would appear to be currently superior to Silver Chef, coupled with a retreating traditional banking sector, AXL is well positioned to continue executing on the strong growth opportunities in this specific niche.
Strong Recent Results
Although coming off a small base, AXL delivered an excellent first half result. Receivables were up by 53 per cent (vs 30 June 2017) to $256m, while profit for the half year was up 95 per cent to $3.2m. Management concurrently upgraded full year profit forecasts from $6m to $7m.
Figure 1: First Half FY2018 Snapshot
Source: AXL Presentation
The key driver of this growth has been the significant increase in receivables experienced in recent years, reflecting an approximate growth run rate that we expect to be maintained in the near to mid-term.
Figure 2: Loan Receivable Growth
Source: AXL Presentation
Subsequent to the first-half result, AXL announced the successful settlement of a $200 million securitisation warehouse facility. CEO, Peter Ferizis noted this to be a significant milestone for the business, commenting “the company is now focused on extracting the long-term benefits, which include a material decrease in funding costs, improved returns on equity through reduced future equity requirements and significant headroom for the core business to grow organically and capture market share.”
In line with AXL management commentary, our forecasts reflect the expectation for ROE to substantially improve in the coming three years. This, in turn, is somewhat reflected in our forecast valuation range of $2.60 to $2.70 per share.
Figure 3: AXL Valuation and NROE Forecasts
Source: Clime, Stocksinvalue
Though the AXL investment proposition is more focused on growth, we also note that growing potential for a reasonable fully franked income stream. With a stated payout ratio of 50%, we expect dividend growth to broadly track the impressive earnings growth profile over the medium-term. This translates to a forecast yield of 4.5% and approximately 7.0% for FY2019 and FY2020, respectively.
While the positive tone of this company update reflects our underlying belief in the business, its management and long-term prospects, there are several risks one must be cognisant of when considering the investment merits of AXL, including:
- General reliance on referral relationships: AXL’s retail merchant network is the key driver of new customer acquisition and any relationship losses would adversely impact growth prospects.
- Credit risk: As with all financials involved in the provision of credit and related product, AXL must continue to sensibly assess, price and manage credit risk. AXL management note a strong focus on risk management (slide below), with factors such as asset security, personal guarantees and accelerated (or front-ended) repayment profiles highlighted.
- Access to funding: Though somewhat mitigated by the recent securitisation program, AXL relies on a mix of debt and equity funding. The withdrawal of funding or inability to raise alternative funding on reasonable terms, could (at a minimum) limit the growth of its business.
- Competitive risk: New and/or resurgent existing competitors may come into the market which may disrupt AXL’s business and market share. Competitors may engage in price competition, aggressive customer acquisition campaigns, or develop superior technology to disrupt AXL’s growth plans.
Figure 4: AXL Credit Process
Source: AXL Presentation
Though such a finance business carries with it inherent risk, which we believe is currently being adequately managed, there remains significant potential for AXL to drive continued strong earnings growth over the next two to three years. Key levers include continued market share growth in its core Australian hospitality and transport sectors, Canadian expansion and the successful implementation of the recently announced securitisation program.
Clime Group owns shares in AXL for and on behalf of various mandates for which it acts as investment manager.