Shares in card protection firm CPP Group (LSE: CPP) rose by more than 25% in early trading this morning, after the firm reported an underlying operating profit of £2.2m, compared to breakeven during the first half of last year.
CPP’s much higher reported operating profit of £20.7m may also have caught the eye of some investors. However, this figure includes a £18.9m non-cash credit relating to the settlement of deferred commission liabilities.
This isn’t a business profit, nor will it generate cash, but it does help to draw a line under the firm’s past problems.
Other highlights of this morning’s results were a further rise in renewal rates, which have risen from 69.5% at the mid-point of last year to 73.2% at the end of June.
Importantly, CPP also said that it had not made any fresh provision for compensation claims related to the mis-selling scandal which nearly caused the company to fold. CPP said that the remaining provision of £3.7m is expected to be enough to complete the remaining claims.
New financial strength?
CPP has been priced for failure for some time now, but the last eighteen months have seen significant changes. The firm has new management team and raised £20m at the start of 2015 by selling new shares. This enabled CPP to restructure its debts and settle various liabilities.
Today is the first chance investors have had to see CPP’s accounts since the refinancing took place.
As you’d expect, the balance sheet is much improved. At the end of June, the firm had net cash of £36.9m. Net assets are now £5.3m, up from -£30.9m at the end of December.
Administrative expenses of £20m were £4m lower than during the first half of last year, thanks to the closure of several UK offices and various other cost-cutting measures.
However, CPP’s operations are not yet generating positive cash flow. Net cash outflow from operating activities was £4.2m during the first half.
The future
CPP isn’t out of the woods yet. The firm’s UK business is declining steadily, due to restrictions on the sales of new products.
Revenue fell by 22% to £45m during the first half, while the number of live policies fell to 4.4m, down by 28% 6.1m at this point last year.
CPP is hoping to replace this lost business with new sales abroad. The group recently signed a contract to provide an automotive insurance product in Spain, and is developing a mobile phone protection business in India.
Other initiatives are underway in Turkey, Italy and China, but it’s clear that the firm has not yet achieved scale in any of these markets.
Is CPP a buy?
Using CPP’s underlying profit as a guide, I estimate that the firm might manage to generate earnings per share of about 0.5p for the full year. That puts the shares on a forecast P/E of 20 at the current share price of 10p.
Given the challenges still faced by CPP, that’s probably high enough, in my view.