Well-known British fund manager Neil Woodford has a big chunk of Morses Club (LSE: MCL) shares in his Income Focus Fund. Despite the bad press he’s been getting lately because his funds have been underperforming, I still think he’s a good long-term bet and I always take notice of the shares he buys, sells or holds.
High-frequency lending
Morses Club operates as a home-collected credit lender and today’s half-year results report some decent figures. Revenue rose 6% compared to the equivalent period last year and adjusted earnings per share shot up almost 25%. The firm earns its living by lending money to people via an “extensive” network of self-employed agents who then collect repayments on the doorstep on a weekly follow-up basis.
The firm is classed as a non-standard credit provider, which means it serves those borrowers who usually can’t get (or don’t try to get) credit through mainstream lending institutions, and most loans are unsecured. Morses Club reckons the majority of its borrowers are repeat customers who borrow on a “high-frequency” basis. The net loan book grew 4.3% over the 12-month period to the end of August to £68m, suggesting that the firm’s offering is popular with its clients and the business is growing. The directors expressed their own confidence in the outlook by pushing up the interim dividend by more than 18%.
Growth is high on the agenda
Chief executive Paul Smith explained in the report that the good figures reflect “The success of last year’s territory builds”. He sees opportunity in the changing regulatory environment that is affecting the industry and said he expects Morses Club “to benefit from further consolidation as regulatory changes force smaller players out of the market”. That may sound a little mercenary, but I think it has always been the case that strong, efficient businesses survive, expand and prosper while weaker players fold, whatever the industry.
It seems clear why Neil Woodford likes Morses Club. City analysts following the company expect robust growth in earnings over the next couple of years measured in the mid-teens in terms of percentage. Yet, the valuation is modest. At today’s share price around 141p, the forward price-to-earnings ratio for the trading year to February 2020 is a shade over nine and the forward dividend yield more than 6%. Forward earnings look set to cover the dividend payment more than 1.7 times.
Morses Club only listed on the stock market as recently as May 2016 and the industry has been in regulatory upheaval most of that time, which could be keeping the firm’s valuation compressed. I think the firm falls squarely into the category of “unloved and undervalued” UK-facing companies that Neil Woodford favours right now.
Another way of looking at it is that Morses Club offers growth at a reasonable price. If investor sentiment starts to improve, we could see an upwards valuation re-rating combining with the firm’s operational progress to drive the share price higher in the months and years ahead. I think the stock is attractive.