I met a young entrepreneur who runs a debt-solutions business that helps people who cannot get out of their financial mess. Like others in its industry, this business provides budgeting advice, assists clients with payment arrangement with creditors and lends money.
Sadly, business is booming. I say “sadly” because nobody likes to see people wreck their life because they borrowed too much money and wasted it. But the debt-consolidation businesses provide a service for people whose debt resembles a runaway train.
He said some clients have $80,000 on credit cards, interest bills that cannot be met, and debt that can never be repaid. Often, the debt relates to the purchase of jet skis, holidays in Bali, swimming pools and other goods that should never be bought on credit.
Consumers only have themselves to blame if they use credit cards recklessly, but what were banks and other lenders thinking when they dished out so much credit, so freely, to people who could barely afford it or had low financial literacy? The debt party had to stop and it has.
Australia’s household-debt level is horrific. As the Reserve Bank chart below shows, the debt-to-income ratio has risen almost continuously since the early ‘90s. Australian households are among the world’s most indebted, according to a recent report by investment bank Morgan Stanley.
Chart 1: Household debt to income in Australia (right side of chart)Source: RBA
Morgan Stanley argues global economies have reached a “tipping point” in the household-debt cycle. Low interest rates and real-estate booms, particularly in Sydney and Melbourne, fuelled rapid debt escalation. But as property prices fall, banks strengthen credit criteria, and interest rates eventually rise, even if just a little, household debt will be a massive problem.
My fear is that many Australians who are badly over-leveraged with debt will succumb to it. Sluggish wages growth and rising living costs will make it harder to service credit-card debt. Savings will be run down and more credit-card debt used to cover living costs.
That vicious cycle will force many more people to debt-consolidation businesses like the one I mentioned earlier. Several so-called “hardship stocks” on ASX that buy distressed debt off companies for a fraction of the cost – for example, unpaid utility bills – or others such as FSA Group that provide debt consolidation and lending services will benefit.
FSA has strong leverage to this trend. The company is Australia’s largest provider of consumer-debt solutions and provides non-conforming home and personal loans.
Founded in 2000, FSA listed on ASX in 2002 through a “backdoor listing” and $600,000 capital raising. From humble beginnings and funding mostly from directors, FSA is now capitalised at $139 million. The company has a good record (based on its return on equity) and market position.
FSA is best known for the Fox Symes Debt Solutions business, which offers debt solutions such as budgeting advice, informal creditor arrangements, personal insolvency agreements and bankruptcy advice. Its target market is consumers drowning in debt and urgently needing help.
FSA’s market share of debt agreements in Australia is 39 per cent, down on levels above 50 per cent in recent years because of heightened market competition. The business has about 22,000 clients with debt agreements worth $398 million.
In consumer lending, FSA’s loan pool was $360 million in FY18, up 18 per cent on the previous year. The loan book looks well managed with only a small fraction of loans in arrears (past 30 days) or having been impaired. FSA is securing a larger lending facility to support growth in this division.
FSA’s net profit rose 7 per cent to $16.1 million in FY18. The market did not like the result in August because the company’s profit growth slowed and its market share in debt arrangements eased. FSA shares have slumped from around $1.40 at the profit result to $1.11 in a falling market, on relatively low trading volume.
The market’s reaction looks overdone at the current price and may be underestimating the potential of FSA’s lending business, which is central to its prospects.
FSA wants to grow its loan book from $360 million to about $500 million by 2020. As banks tighten lending criteria, FSA and others that provide non-conforming home and car loans could see greater demand for their services. More people who are struggling to get credit from the big-four banks will look to smaller lenders that provide non-conforming loans.
FSA said at its 2017 Annual General Meeting that its loan-book growth “continues to exceed our expectations”. A larger loan book boosts its profit margins due to greater scale.
Record household debt and the prospect of higher interest rates within 18 months are other tailwinds. FSA said at its AGM: “New enquiries are increasing and demand for our product and services is growing. This is currently occurring in a historically low interest-rate environment. As interest rates normalise (start to rise), demand for our product and services will increase.”
The insightful share-valuation service, Skaffold, values FSA at $1.31 a share in 2019, rising to $1.52 in 2020 and $1.71 a year later. The current price ($1.11) offers a sufficient safety margin and, if Skaffold’s assessment is correct, the valuation growth trajectory appeals.
Capitalised at $138 million, FSA suits experienced investors who are comfortable with thinly traded micro-cap stocks and higher risk in this part of the market. The stock can be volatile.
Chartists will look for FSA to hold above $1, a price point of previous support.
Chart 2. FSA GroupSource: The Bull
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at November 14, 2018.