One company that has taken the global pandemic in its stride is Australia’s largest sub-prime lender and second-hand goods retailer Cash Converters (ASX: CCV), which has not only held up against a challenging period but is achieving growth as the Australian economy continues to adapt to COVID-19.
Headquartered in Perth, Western Australia the group has diversified from its store-based retail and pawnbroking origins into personal and vehicle finance.
While expanding its domestic and international store footprint, the company has invested heavily in its digital retail and lending assets, which have attracted greater attention as foot traffic plunged during lockdown periods.
Speaking with Small Caps, Cash Converters managing director Sam Budiselik discussed how the company is lining up to take advantage of increased consumer confidence with a growth strategy focused on network expansion and product development.
Multiple revenue streams
Cash Converters was founded in the mid-1980s as an Australian retail and pawnbroking business, but this only makes up a portion of its revenue today.
Considered the ‘engine room’ of the company, personal finance is by far the biggest contributor to total earnings. At $17.7 million, it accounted for more than 48% of earnings before interest, tax, depreciation and amortisation (EBITDA, before head office costs) for the first half of the 2021 financial year and pulled in a profit before tax of $14.9 million.
Cash Converters offers small and medium amount credit contracts (SACC and MACC) online and in-store – that is, short-term loans to a maximum of $2,000 for SACC and up to $5,000 for MACC. Revenue is generated from fees and interest charged on the loans. At the end of May, Cash Converters’ personal finance loan book had a combined gross value of $111.3 million.
Mr Budiselik said it was not uncommon for the company to receive more than 1,500 loan applications in a day.
“The average SACC loan value is $1,035 over 10 months and average MACC is $3,436 over 16 months, so when you consider the size of our loan books this gives you an idea of the volume of transactions our personal finance business completes each year.”
Making up another 20% of total EBITDA is the company’s corporate network of 75 retail stores, which sell new and second-hand goods, provide cash advances and pawnbroking across Australia. This segment delivered an EBITDA of $7.3 million and profit before tax of $1.1 million in the FY 2021 first half and its pawnbroking loan book as at 31 May stood at $17.2 million, including accruals.
The next business unit ranked by earnings is vehicle finance, which offers secured loans between $5,000 and $45,000 via Cash Converters’ wholly-owned subsidiary Green Light Auto Finance (GLA).
GLA delivered $6.4 million in EBITDA for the half year and its loan book at the end of May 2021 was valued at $43.1 million.
Cash Converters’ fourth revenue stream is its franchise operations, which comprise 700 stores worldwide including 80 in Australia. The group also has a 25% stake in Cash Converters New Zealand.
This business unit generates earnings through franchise fees and royalties, which at $5.2 million in half year EBITDA make up 14.2% of Cash Converters’ total earnings.
Performance during COVID-19
Cash Converters was not as significantly impacted by COVID-19 as other businesses thanks to its diverse revenue streams. According to Mr Budiselik, where one business unit (personal finance) took a hit temporarily, another unit (retail) improved.
“During the peak of COVID-19, the stimulus initiatives enacted by the government, including allowing people early access to their super, meant the need for cash within our customer base reduced dramatically,” he said.
“Our loan volumes dropped as well as our loan book values, as customers made the prudent decision to settle their debts.”
“On the flip side, customers realised they were going to be spending more time at home, so we had a run on tech items such as PlayStations, tablets, phones and computers, as people stocked up their homes in anticipation of lockdowns.”
And while COVID-19 driven lockdowns restricted foot traffic to brick-and-mortar stores, there was a considerable uptake in customers engaging with Cash Converters’ eCommerce website, which raked in $5.3 million in online retail sales in the FY 2021 first half – up 39% on the previous corresponding period.
Mr Budiselik said this scale and diversity makes Cash Converters uniquely positioned to withstand and ultimately benefit from large shifts in the economy.
“The strength of our business model has remained particularly evident over the past 12 months. It’s a unique model that is difficult to replicate.”
“Our customer service proposition has been successfully integrated with our physical stores operating in tandem with industry leading online digital assets, powering revenue growth across the businesses,” he said.
Mr Budiselik said each business unit that contracted at the height of the COVID-19 outbreak in Australia has started to recover and, in some cases, are already exceeding pre-COVID-19 metrics.
Cash Converters expects to release its full year results in late August 2021, and Mr Budiselik has flagged expectations for a “softer” result from the personal finance segment due to the lag from reduced loan book values last year.
Although, as most of the company’s loan terms run for less than two years, the earnings impact stemming from these reduced book values will be “temporary and largely quarantined in FY 2021”.
“The improvements we’ve made to credit decisioning and application processing during the crisis generated significant momentum in our personal finance business, which will assist our growth as the broader economy recovers,” he added.
The increasing certainty and confidence among Australian consumers, coupled with decreasing unemployment, wage growth and stronger household consumption, points to Cash Converters’ continued recovery in the Australian market.
“People are spending, household savings are coming down and the demand for credit is increasing again, all of which contributes to the recovery in our loan books,” he said.
Cash Converters’ growth strategy is focused on acquiring franchise stores and folding them into its corporate network, building new stores in high-growth regions, as well as refining existing and developing new products.
“We have acquired six franchise stores across four states in the past nine months, all of which start to contribute earnings from day one as a corporate-owned outlet,” Mr Budiselik said.
The company also undertook a strategic review of its vehicle finance segment in 2020, resetting its credit risk appetite, product configuration and eligibility criteria to become more competitive.
“We rebuilt the credit scorecard and developed our own proprietary B2B loan application platform, and we’re now in a position to expand our broker and dealer network,”.
In addition, the company recently announced plans to develop new financial products with Mr Budiselik staying tight-lipped on these, only divulging that a “couple of pilots” are underway.
The point of difference of Cash Converters’ finance products
There is no denying the growing popularity of alternative credit solutions such as buy now pay later (BNPL) services nor society’s perception of “payday lenders”. But Mr Budiselik said while BNPL and early wage access operations appear to have identified a gap in current legislation, Cash Converters’ lending products will always be designed and administered in line with all appropriate legislative and regulatory requirements.
The company asserts its loan products are fully regulated in line with the National Consumer Credit Protection Act 2009 as well as other credit licensing and anti-money laundering legislation, with oversight by the Australian Securities and Investment Commission (ASIC), the Australian Transaction Reports and Analysis Centre (AUSTRAC), as well as police in each state and territory.
This means credit pricing is determined by appropriate legislative frameworks and assessment procedures are comprehensive, like a mortgage application, with affordability checks carried out to ensure a customer can repay the loan in the agreed timeframe.
“We have no tolerance for compliance risk, but we have a data-driven appreciation of credit risk. There is a view that anyone can get a small loan but the reality is that we decline over 70% of loan applications based on unsuitability,” Mr Budiselik noted.
“Our product configuration and assessing process mitigates the risk of a customer falling into a ‘debt spiral’ as all loan products are responsibly assessed and amortised for full repayment.”
“Due to the unsecured nature of most of our lending there is no incentive for us to write bad business and there is a very clear need within our customer segment for safe and reliable financing. As the largest regulated provider of finance that millions of Australians rely upon in the growing market that Cash Converters services, the company remains committed to meeting that need as the most trusted lender in our markets,” he added.