FSA Group: insolvency is their game

[Packersoldkidney]

Very good report just released....this is one for fundamental investors to run the ruler over. Ripped a quote out of the report just to get this thread rolling:

"FSA’s core activity is to assist individuals who are experiencing financial difficulties. It is the largest personal insolvency business in Australia. FSA initially started as a single product provider. Over the past 18 months it has diversified the products and services it offers debtors to assist them resolve their financial difficulties."

Looks like a company that will start to profit as the air comes out of the boomtimes we've been having.

For those with a long term outlook; looks undervalued to me.

[Packersoldkidney]

I'm surprised this isn't getting more interest on ST: great little stock to have in declining economic conditions. Solid fundamentals. Is up around 60% since I mentioned it here, albeit on low volume.

Will get more interest as conditions soften.

[tommy]

Nice pick POK,

I was looking for a company in the insolvency industry but didn't know about FSA at all, it looks like one worth keeping an eye on! Very interesting, I must do some research on this myself.

Illiquidity might be an issue but it doesn't matter if the company is performing[:I]

I am also looking for debt-collection houses but having trouble finding performers... do you know any?

[Packersoldkidney]

To be honest Tommy, none of the top of my head....I'll keep them in mind when I'm having a look around though, and post them here if I find any.

[mark100]

Hi POK,

Nice pick. I got some of these a couple of months ago at 17.5c. At the time I estimated it was trading on a 2006 PE of 6. So I suppose that has increased to around 10 now.

Here is a bit of a summary I posted on another forum at the time (2 April). Might help give others some background info:

"FSA group seem to be trading on attractive fundamentals.

FSA's main focus is helping out people in financial difficulty. There 2 main areas of business are:
1. Acting as an administrator for people entering into debt aggreements, insolvency arrangements etc
2. Acting as a finance broker for people in financial dificulty who need to consolidate debt etc

The first area of business was effectively created by a few years ago with an amendment to the bankruptcy act. Rather than being declared bankrupt immediately, people now have the option of entering into a debt agreement with the bank etc whereby they enter into an agreement to pay back what they can in installments. This can be a beter option for the party that is owed the money rather than having the person declared bankrupt and potentially not receiving anything. FSA arranges these agreements

The second area of business is basically a mortgage broking business but they only originate loans for people in financial trouble. You may have seen them advertising as Fox Symes and Associates on TV. Basically, some people get into financial difficulty from credit card debt, person loans etc making their monthly repayments impossible to cover. Sometimes these people have some equity in their home and these debts can be consolidated into one loan over 30 yrs, greatly reducing the monthly repayments. Obviously its not a good idea to be putting personal debt onto a 30yr term but sometimes this is the only way people can get out of trouble. When FSA does a consolidation loan, they are simply acting a mortgage broker like say Mortgage Choice and get paid the same way, via an upfront and trailing commission

Their historical NPAT is

FY 2004 $1.2m
FY 2005 $1.3m
H1 2006 $1.265m

The first half of this year was a large jump. The directors say they expect the second half to be as good. So if we double the first half result they could earn $2.5m for FY06. There are 89m shares on issue which gives potential EPS of 2.8c.

Operating cash flow for the half was strong at $2.9m. The market cap is currently $15m and they have $5.6m cash in the bank. Current Assets of $11m vs Current Liabilities of $5.6m. They have no debt.


Now, to complicate matters FSA is seeking shareholder approval to buy a business called the 180 Group. A brief discription of the 180 Group I have copied says:
"The 180 Group commenced business in July 2003 and specialises in corporate advisory services.180 Group works closely with a client company’s accountant and lawyers to assist the directors ofsmall to medium sized companies which are experiencing financial difficulty. 180 Group providesolutions to resolve these financial difficulties. The solutions are aimed at preventing the companyfrom entering external administration, or at least planning how to best deal with an external administration should it be unavoidable."

They are paying for the 180 Group by issuing shares and convertible notes. The issue of convertible notes is dependent on financial performace over the next 3 years. The details of this is in the recently released explanatory memorandum.

In summary, assuming the 180 Group earns better than $0.5m this FY, 16m shares will be issued (I have assumed conversion of the convertible notes into shares). This represents a pe of 5.5.

If it earns better than $0.75m in FY07, an extra 8m shares will be issue. Better than $1.15m in FY08, an extra 8 shares will be issued and better than $1.45m in FY09 will see another 8m shares issued.

I'm not real keen on this progressive issue of shares however the profit targets do imply a high level of growth from the new business. The value they are paying for the acquisition down the track can't really be determined as we do not kn

[Packersoldkidney]

Fantastic analysis, Mark, superb: it was the fundamentals and the industry FSA are in that attracted me to them. Some of your figures would have changed now obviously.

There isn't a lot of scrip available to buy, and it appears others are of the same mind as we are; that this is undervalued on a fundamental basis. I grabbed some around the mid/late teens like yourself, and am hoping there will be a pull back to get some more somewhere down the track. If not, I'll just have to make do with what I have.

[mark100]

Thanks POK. Yes I would have liked a few more as well but it run faster than I expected. I will look to top up if it pulls back to the mid 20's.

cheers

[OneUp]

Yeah, talk about tight scrip. I've been trying to accumulate all week without much to show for it, and the one decent sized sell at 30c was pulled late today. Guess I will just need to be patient.

Great fundamental analysis Mark. 180 Group may turn out to be a rather expensive acquisition the way they've structured it. The deal looked OK when they originally announced it, but FSA's shares have since gone up from under 5c to nearly 30c.

[OneUp]

One more thing. There was a lawsuit from the ACCC ongoing. Didn't see any updates on this.

2005 annual report:

"As reported last year, the Company continues to defend allegations from the Australian Competition and Consumer Commission (ACCC). At the time of writing, the allegations have been reduced, however the company expects to incur significant expenditure on legal fees in the year ahead. We take this opportunity to state that, as with any legal proceedings, there is inherent uncertainty about the prospects of a positive outcome."

[steve fleming]

Yep - a nice little outfit, with a pretty good monopoly in that part of the market, and diversified/ing….

Given the nature of their customers though – ie they have little/limited money, it might be worthwhile keeping a close eye on the write downs and provisions….which are likely to be rather high….therefore impacts on CF....

Provisions for bad debts

In 2004 5,175/10,435 = 50%
In 2005 6,719/11,570 = 58%!!

- exceedingly high - ie they estimate to collect only $1 in every $2 of debtors
-and trending upwards…so little concerning


bad/doubtful debt expense/ revenues –

in 2004 3,931/13.921 = 28%
in 2005 2,755/14,178 = 19%

- reducing / improving, maybe due to diversified earnings, but still high…....essentially every five jobs they do, they only invoice 4...and collect in cash (collect debtors) less

so essential to monitor cash flow…..