Home collected credit (HCC), often referred to as doorstep lending, has been around for decades, and despite the advent of the digital age looks likely to remain a feature of the UK credit market, particularly for those consumers who are financially disadvantaged including those living on benefits. In terms of "knowing your customer", it is hard to beat a model where agents visit borrowers' homes to collect payments. Loans are arranged in the consumer’s home with fixed payments and no late fees or accruing interest. Borrowers know exactly what they are borrowing and on what terms. Morses Club PLC (LON:MCL) is the no. 2 lender in this market serving 216,000 customers with an average customer balance of £570 and loan duration of 41 weeks.
Customer satisfaction scores are 95% or above, repeat customers >90%; Morses Club PLC (LON:MCL) is well established and successful at what it does and has not previously diversified into other adjacent markets. Loans are issued and collected by self-employed agents who are paid commission on what is collected, not on the loans issued. In the financial year to February 2017, Morses Club advanced £144.1m and collected £217.2m.
The non-standard credit market is evolving but HCC is set to remain a core service. Provident Financial Group (PFG), the major player in the sector, is scaling back HCC activity in favour of other product markets, providing short-term opportunities for Morses Club to pick up new business. In the longer term, the growth of digital and online product markets offers the potential to reach selective new customers and reduce the cost of serving existing customers. We see both of these developments as exciting propositions for Morses Club’s growth and believe that the business has already invested internally to cater for increased customers.
Acquisition potential as regulation forces business change; a third driver of growth may come from more stringent industry regulation which has the potential to persuade a significant number of smaller firms to look to exit of scale back their activity. This may increase loans offered onto the market by Morses Club, which has already increased scale and products offered by executing the selective acquisition targets including Shopacheck Financial Services in 2014.
Loan performance is critical and capable of stable returns; the credit crunch of the previous decade was a difficult period for the industry, but the current decade had seen Morses operating on an even keel. Looking at the results for the financial year to February 2010, we can see that the Company turned a profit and collected more cash than was lent. In every subsequent year following the credit crunch the Company made a profit. We concur with management that the business may see shifts up and down in the overall market as the economy improves then deteriorates, but that does not necessarily correlate with loan book deterioration. Missed payments do arise, but there is no fee or accruing interest. We believe this is key to arrears performance as collections can resume without further customer charges.
Agent territory builds have accelerated since the full year results; Morses Club announced on the 18th August that net new agent territory builds in the year to date were over 400, adding to the 1,826 reported for the full year to February 2017. This is in-line with our estimate for the full year to February 2018. We expect more modest additional net new territory builds from hereonin, reflecting the weighting of net new builds to the beginning of the year.
Our approach to the valuation of Morses Club is guided by our central findings.
Changes in the competitive landscape of the UK unsecured non-standard credit market are likely to result in Morses Club growing its agent numbers and customers between 2017 and 2019. This is our short-term growth driver of revenues and earnings.
Changes in the market are likely to result in Morses Club growing its products and routes to market to serve customers in adjacent markets to traditional HCC. This is our long-term growth driver of revenue and earnings.
We have established forecasts for 2018 and 2019 that quantify the likely effect of point 1 but these do not capture the effect of point 2 as changes in product markets will take longer to mature. We project that longer-term EPS will grow at closer to 5% with the advent of new products for adjacent markets to HCC.
Our near-term valuation looks at historical peer valuation on a P/E basis, and at the valuation of our forecasted adjusted EPS for Morses Club in financial year 2019. On an adjusted EPS basis, Morses Club is trading on c.10.5x 2019 EPS