LON:MCL | Morses Club - What Am I Missing

18th Sep '20 by Robert W

44 comments 2377 reads

Have been looking at Morses Club (LON:MCL) and struggling with the courage of my convictions. Clearly there are risks but they have done alright through lockdown so far, their move to digital is encouraging and so far successful, their customers like them. I have Jack's recent write-up and concur. PE of 4.89, P/FCF = 3.5, yield 9%. They are priced for disaster but seem to be trading perfectly satisfactorily. Down another 6.5% today as I write. Am itching to buy but there has to be something significant that I am missing. Your thoughts truly appreciated!

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About the Author

Robert W

Premium Member

44 comments

ezlifeme

26th Nov '20

Morning Studying Hard, re Morse's delay in reporting - I believe the 9th June regulation was brought in due to Covid and Auditors having issues with self distancing and lockdown in meeting previous years reporting and work deadlines.

I would assume that is why it is quoted here - to try and dispel your sort of concern

StudyingHard

26th Nov '20

How many companies are actually needing to make use of these deadlines however? Is it very common or something of a rarity?

The volumes in todays drop does seem to signal people taking profit from yesterday/smaller investors with cold feet rather than major sell offs from the smart money I suspect (with my amateurs opinion). Personally my thesis for buying still holds so I'm staying in myself, but the nagging question is, why the delay and is it a delay common in other UK companies, in particular in their sector/size bracket.

ezlifeme

26th Nov '20

Delays have been quite prevalent, sensible companies have been quoting the regulation to avoid spooking the SP

Having done (non regulatory) audits and been audited many times - I know that remote audits are causing more effort and time Often data is having to be downloaded and shared securely, then the auditors review come back, ask for more etc. Just takes more effort so may be genuine (BUT Not always the reason) DYOR as always

StudyingHard

26th Nov '20

Let's cross our fingers that's the issue then, rather than something very fishy in the accounts. I still think something rotten is the only way this can be a loss at the rates I've bought in at but time will tell of course.

Personally I only invest with "training" money so at worst I'm out a couple thousand pounds even it went bankrupt. I do strongly suspect that Morses is in for a very good 12-24 months though.

Sadly I think the UK is going to have an increase in their customer base in the near future with both Brexit and Corona.

dustyie

26th Nov '20

Auditors needing time extension is genuine in my opinion . I know myself remote working is causing severe problems where skill staff are required e.g. staff not being replaced, new staff not being trained , existing staff work output severely reduced .. delays due online technical problems or lack of knowledge etc. and now the backlog is getting longer .
Only yesterday I heard call centre workers was getting through 40 calls/ (closed out calls ) a day last year , now at best from there homes its down to 30 calls daily.
On top of all that staff morale is very low ..

Momoko Miyamoto

27th Nov '20

IMO post covid-19 the doorstep lending business model looks shaky. Short term they've moved existing borrowers onto online payments but I doubt they'll be able to recruit new borrowers at previous rate of growth. I've gone for H & T (LON:HAT) instead.

StudyingHard

27th Nov '20

Why do you think it's shaky post-covid? Covid has unfortunately created a massive rise in people with bad credit in the UK thus expanding their potential customer base hugely.

I'm curious if I've missed something, but from where I'm standing Corona might be the best thing to have happened to Morses. It will have forced a much quicker shift to digital, both in corporate focus as well as massive boost to client adoption rates as well as creating a larger potential customer base.

Once the vaccine is distributed, doorstep lending goes back to normal save that the agents will have lost clients to the online portal, so they gain incentive to hunt new clients without the share-holders losing value (the opposite really as portal clients don't require the company to pay commissions to agents).

Zipmanpeter

27th Nov '20

Re Morses Club (LON:MCL) I agree that Home Collect is challenged as an industry going forward - it was declining by perhaps 4% pa before COVID. However, it is a bit more nuanced at a company level.

Key direct competitors (%market share) are weak:

PFG (>40% ) - focused elsewhere, losing money & reported morale issues as they 'rightsize
NSF - absolutely cash strapped and needing re-capitalising
MCL - still profitable
Regional/Small players (>40% market) - already struggling with regulatory costs/ compliance pre-Covid, reportedly ageing ownership teams and must have had losses

The official Morses Club (LON:MCL) answer in today's results webinar was that

The market will grow as the recession hits so the pool of Home Collect users will grow
They are well placed to opportunistically pick up dislodged customers/agents from other
They are open to buying loan books as regionals go under/want to exit
MCL refer a friend scheme (for Home Collect) is now working on digital (!)
They are pivoting to other forms of lending and the existing customer base helps them
(My favourite)..they will keep existing customers better by also offering cheaper loans since customers yo yo back in & out of using Home Collect as their fortunes wax and wane

I hold and bought more today as I was reassured that no major nasties are out there. The re-instatement of a 1p final divi for last year supports that confidence. We are likely to get decent divis next year whilst we wait for the share to re-rate with the longer term drivers.

StudyingHard

4th Dec '20

Since the volume spiked up today I did a little news sweep and came across this interview from yesterday: https://www.directorstalkinterviews.com/morses-club-qa-opportunities-going-forward-are-immense-lonmcl/412943496

He pretty much resonates my own opinions and I can't really see any deep flaws in his logic. Anyone else have a more critical input/anything they can arrest him on here?

Unless there's accounting dirt (which is looking more and more doubtful) or some new major event in their way, I'd be very surprised if this stock doesn't hit 80-100 within the next 12 months personally and I won't be too shocked if it sees old levels of 120-130. I'd probably be happy to sell between 80 and 120 depending on how the business case looks by then, however I wouldn't be surprised if the company can go past old evaluations as it does honestly seem like a sleeker, more future geared company in a less competitive marked post covid.

I hate being a blue eyed optimist but barring unforseen major events it does seem pretty likely to me.

Zipmanpeter

4th Dec '20

The key medium term risk is regulation - if the FCA's Woolard review is harsh on the sector or if the government steps in (again) to 'protect' people from high interests rates which might be politically popular, then anything could happen.

I wrote to the company on the issue and received a reply that they 'welcomed' the review since they expect it to benefit responsible lenders with good procesess which favour the consumer - something they think will help them long term.

My interpretation is that they expect the process to force out more smaller competitors enabling them to pick up new agents and customers on favourable terms, offsetting the long term decline in the Home Credit sector (maybe -4% CAGR before Covid which has probably pushed more into digital lending........that Morses are also entering with Dot Dot loansd and Shelby.

(Personally I now see COVID as being a limited duration problem now - another 4 -6 months at most before the economy is free again - at which point I expect Morses Clubs locked down customer base to go on a cheap foreign holiday blitz, even if they have to borrow.

Aside that, I am equally optimistic.

Momoko Miyamoto

5th Dec '20

Lockdown and social distancing has gone on long enough to result in long lasting behavioural and attitudinal change. I think fewer borrowers will be comfortable with allowing door to door lenders into their homes and may look to alternative forms of non-standard finance e.g. pawn shops. Without the door to door personal interaction, Morses' business model is defunct.

StudyingHard

7th Dec '20

That ignores their massive strides in the online business though (the entire reason why their profits in the last report are so down, one-off costs relating to this pre-covid).

Also, I suspect you're over-estimating people's will to change. The UK has shown that people are unwilling to stop going to pubs during the height of Corona.

I suspect a look into statistics will show us that people who worry most about Corona are also likely people with some form of higher education. Which will probably be the least represented among Morses Club customers who are likely more lower education prone. The same type of people who frankly, are not overly fussed about Corona.

I do think we will see a massive shift in digital though, but because Morses Club is pushing it themselves rather than clients being too concerned to open their doors.

StudyingHard

7th Dec '20

https://www.proactiveinvestors.co.uk/companies/news/935840/morses-club-present-at-the-proactive-one2one-virtual-investment-forum-935840.html

This came out a few hours ago. A bit of a sneak preview on the future. I only viewed it with half an ear, but he doesn't sound like someone overly worried about the numbers he's about to publish.

If anything Morses seems a lot more focused on growth as a result of covid than they do potential losses and problems.

Still not loving the whole revolving CFO thing but so far everything seems to be on the up and up.

Can anyone with more experience than me pick up any danger signals? I did notice that the share price seemed to drop down from their highs after this was posted. Unsure if that's related and I just didn't catch the danger signals or just the motion of the ocean.

For my part, it looks like the company is going to come out of COVID much stronger in the long run. I suspect ethics might also be why the stock is depressed. Let's be honest, this is the most evil investment most of us hold in our portfolio's. I guess you could argue oil shares or arms manufacturers can rival it but at the end of the day, predatory loan companies are not in vogue in today's woke/ethical world among money managers...not that I think they'd spend much time looking at a company this tiny to begin with.

Zipmanpeter

7th Dec '20

Studyinghard,

Thanks for sharing. I listened all through and heard lots of interesting stuff

1. First - the dog that didn't bark: impairments - the number 1 risk. However, this was something that had already declared with LY results via a 1.7Mn write down and a another 5.6Mn exceptional item treated as a post balance sheet event. The CEO did say like for like repayments were the same - just with a much smaller customer base. So my take was the 5.6Mn cleared the deck and declared impairment this year will be within the 22-26% range.

2. Some 2 acquisitions on Home Credit and 1 in Digital are currently under evaluation. There was a bullish quote that post COVID smaller competitors were 'in dis-array' since they had lacked both access to credit and technology to get cash from customers during lockdown impression these are small and could be funded with existing resources - although banks are offering more money if required.

3. Digital expected to add $1Mn/month growth going forward and to breakeven by Feb 22. Same with banking (from 10 to 50K customers next year, a significant quantity cheaply sourced from Home Collect customer.) Net, expecting a $9Mn Digital pick next year, leading to a return to FY20 profits (when he ppointed out share price was +/-150p

4. Dividends to resume from next year at 50-60% payout level

5. Additional services now allow it to target an opportunity x8 vs Home Collect as well as diversifying risk.

6. Watchout - last CFO was pushed out after 9 months and excuse of being Hampshire based with a change of family circumstance seems a bit thin. However, seems happy with new guy and interim CFO was the former CFO so little chance of anything being missed. Only niggle is that there was also mention of arguments with the auditors over COVID treatment. Did the CFO leave because he saw more risk/loss than the MD wanted to acknowledge?

7. Funding - claim bags of headroom and supportive banks. Paid off expensive debt and reduced loan facility as lots of cash came in with Covid stopping new lending. Thgis included some expensive mezzanine debt.

8. Growth - CEO very bullish in BOTH Home Credit and especially digital, In the former bounce back as soon as target market have something to borrow for - resumption of holidays?. On the latter growth plans on track and all reconfiguring done

I liked what I heard and will probably add to my existiing Morses Club (LON:MCL) holdings based on this (and vaccines etc)

Zipmanpeter

30th Aug '21

74.6p SR 95 (Q88, V85, M70)

After peaking at around 93p in late June 21 (vs 32p in Nov 20) , Morses Club (LON:MCL) is now 74p
The Woolard Review in Feb '21 proposals held few surprises - regulation to be increased and extended to 'buy now, pay later' products, greater focus on 'outcomes' vs specific prescriptive rules reflecting the speed of change in the market and the desire to use that
There was a recognition that Credit Unions etc need some regulatory help to grow which should be encouraged/done/funded but that would not be gamechanging
Specific thinking over repeat use of fixed term credit (like doorstep loans) even if not over-lapping
Net no incremental regulatory risk (which means a reduction in risk)

However, not heard much of a political push to make any of this a priority for govt legislation.

In the background, Provident are continuing to exit the doorstep market to cauterise their largely self inflicted problems, Non-Standard Finance remain un-recapitalised and lots of smaller competitors have quit the sector - so the market is clear for Morses as it recovers. Total market numbers will be down but MCL mkt share will be much much higher. I expect the effects to net off. Result will be return to broadly 2019 profit levels - maybe higher as increased digital lending/collection and closing of offices will have cut costs considerably.

The company reported positively on Digital developments as it announces that it will re-list on AIM under a new ticker UMY for U Money. This signals to me the Digital side will become the more important side of the business (which might cause the business to rerate by becoming seen as more of a technology play)

Net, all continues to seem to point towards steady recovery towards a profitable future.

Alphaflight

31st Mar '22

Morses Club has dropped hard since Paul Smith left the company last month.

The company scores very well via the Stockopedia metrics however.

Does anybody have an opinion on this stock and its future prospects?

Bigtim

31st Mar '22

Prompted me to take a look. I see the profit warning and that CEO selling out before exit hit the shares hard. Profits have been smashed since 2019 and the dividend is (of course) under review. Slim margin business and would that improve or worsen with rising rates? I mean they've gotta borrow from somewhere and they already unsecured lenders so their rates to customers will be high.

They see impairment preventing their digital division moving to profit until 2023. So everything is on the doorstep lending, to a market that's got a huge and growing cost of living problem. More impairments to come here?

After Amigo I see the main issue here is the regulatory risk. I'd wait until full year results to see how new CEO is getting a grasp. One for braver souls.

Alphaflight

31st Mar '22

Hi Bigtim,

Thank you very much for your response, you know a lot more about this than me.

Also your point about waiting for the full year results is a wise one!

Thanks again.

Antehelion

31st Mar '22

Also - could these same challenges - borrowing rates from high street banks going up, cost of living going up etc be positives for the company in terms of new customer demand?

I agree with the chance of higher impairments but I think the closure of other competitors along with the above levers could provide a bigger pool to sell to - or be more selective with, perhaps.

Bigtim

31st Mar '22

Entirely possible - crisis creates opportunities. Alpha flatters me; I only had quick a look over what's here on stock and in the RNS. I would worry that they have already had impairments in digital and have closed their new bank account product.

The profit comes from doorstep lending and those people are seeing their disposable income hit - will they prioritise their loan repayments over food or heating?

Then of course there is the regulatory risk.

The shares have been battered and the lagging figures make the co look cheap but... I'd want to see some solid positive news before I took a punt. Others will be happy to spin the wheel here and they could well be right with an incoming CEO not sounding like he's about to kitchen sink anything.

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Morses Club - what am I missing

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About the Author

Robert W

44 comments

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