Cash Converters (CCV)

Market Cap: 298M
P/E: 11.1
P/B: 1.83
Dividend Yield: 4.5%

The first thing you notice when you look at CCV’s financials is the cumulative shareholder return over the past decade: 37.7%. This means a $10,000 investment in the pawnbroker and personal loans company in 2001 would have grown to $245,097 today.

But that’s history.

Looking at the contemporary state of CCV, we see a business which is selling for 11.1 times earnings and 183% of book value. With their market cap of $298m, CCV is sitting on a healthy $50m cash; this is being used to fund acquisitions, mainly of their franchisees. Debt/Equity ratio is 8.7%. Evidence of future growth is found in management’s FY11 profit guidance of 27M, which would grow the company’s bottom line an additional 21% year on year. Management has a long-term strategy to improve the image of the Cash Converters brand to be more legitimate, opening the business to new customers.

It is important to note that the cash sitting on the balance sheet is due to a share placement made by American equivalent EZCORP, which operates 897 pawnbroker and short-terms loans outlets in the USA and Mexico. EZCORP currently owns about 33% of CCV. This investment is a vote of confidence by a larger player which will help Cash Converters enter its next phase of growth by buying out franchisees. Long-term, the company will be getting more and more of its EBIT from financial services, while the franchising component will shrink as more stores move over to corporate ownership.

Cash Converters began buying back franchisee-owned stores in early 2008, at an average acquisition price of 3.9x EBIT (roughly equal to the company-level EBIT). They also acquired the Scotland master dealer license for £420,000. In addition to the annual license income of £131,000, this dealer license gives Cash Converters scope to expand the Scottish business above the current 10 stores (estimated saturation point of 60 stores).

Although the main Cash Converters store network is in Australia and the UK, they have boots on the ground in countries as diverse as Spain, South Africa, Malaysia, Thailand and the USA. I do wonder about how well they will do in these countries with less than 10 stores, when it may be more prudent to focus on their Eurozone operations first, using the UK footprint as a base to expand into mainland Europe. Due to their small numbers these ventures won’t screw Cash Converters if they go bad, and is a good way to test the brand in new markets, expanding their footprint in countries where they are most successful. These non-European locations should be good for longer-term growth when the European market approaches saturation.

While they are still adding new stores in Australia (at the modest rate of 8 stores per year vs 32 per year in the UK), most of the business’s growth will come from overseas. Store numbers in these core markets are by no means saturated, and management’s disciplined rate of expansion is to be commended:

Australia: 139 stores with with potential for 200
UK: 150 stores with potential for 600

At 78.5c CCV is not as good value as it was 3 months ago, but the underlying business is just as solid. Negligible debt, profitable, plenty of cash and room for growth positions Cash Converters really well to continue their success. With current ownership at 33%, a takeover of CCV would be a natural development for EZCORP. EZCORP’s share price has doubled in the past year, taking their P/E to 15 – while CCV are selling for 11.1 x earnings. If a cash or share deal were put on the table, I plan to sell immediately, provided I could get an equivalent price for my shares on the open market. Otherwise I intend to hold my shares long-term, unless an exuberant market pushes the earnings multiple too high, or the business changes structurally in a way which makes continued share holding undesirable.

Colorpak (CKL)

Mkt Cap: 52M
P/B: .85
P/E: 8
Div Yield: 5.1%

My first buy of the year occurred after offloading the last of my blue chips.

Colorpak designs and prints packaging, a decidedly dull and steady business.

Recently CKL acquired Carter Holt Harvey’s packaging business, for a mere $5m, funded from existing cash and debt facilities. The business is expected to add 125m rev and 4m EBITDA to CKL’s existing business, and increase EPS in the first full year of ownership (ie end June 2012).

This will bring on more clients for CKL, realise operational synergies, expand their offering to market to include the fast food industry, and expand their current market footprint to include NZ.

This acquisition looks to be an inflection point for the company, a view held by CKL’s executives. CHH’s acquisition will nearly triple CKL’s revenues and give them a market leading position to capture more of the market through additional acquisitions (CKL have made a number of acquisitions since 1998).

One such acquisition was made in 2010 of the Remedies printing business, which was in administration. This is expected to add another 1-2M of revenue and contribute to EPS over the next 12 months. This will also expand CKL’s offerings outside the folding packaging business.

In terms of folding cartons, CKL’s main business, CKL control roughly 11% of the market, with CHH and Amcor controlling about 25% each. The purchase will give CKL an equal market position against Amcor (who purchased part of CHH’s folding carton business as well) and dominate VISY (who control about 10%).*

Turning to Amcor, over 150 times the size of CKL, you see a vastly different balance sheet. Selling for twice book and 15.3 times earnings, AMC operates on a net profit margin of 4-5% compared to CKL’s of nearly 8.

Barring a major increase in price or major structural issue with the business, I plan to hold this into late 2012 when the CHH acquisition has been fully integrated. If the dividend yield continues to be high I plan hold past this date with the anticipation of further benefits through additional acquisitions and capture of additional growth and profitability through CKL’s increased size.

* It has been necessary to revise this article due to new information about CKL’s market share