Cash Converters’ strategic alliance with EZCORP (CCV)

Yesterday it was announced that EZCORP would be increasing their stake in CCV from 33% to 53%. This would be initiated through a 91c per share offering, pending approval from 50% of the shareholders and the Supreme Court of WA.

In addition to this controlling interest, Cash Converters and EZCORP will enter into a strategic alliance to develop more financial products, building on Cash Converters’ experience as a consumer lender.

CCV and EZCORP will form a couple of JVs:

One equally owned to focus on consumer loans opportunities outside Australia, UK, and the Americas.

One owned 80% by EZCORP and 20% by CCV which will focus on consumer loans opportunities in the Americas.

Loans products will be marketed under the Cash Converters brand.

Cash Converters have been deliberately focusing on their loans business for future growth (observe the rapid takeup in the UK, where the loans business is still in the startup phase), and this new strategic alliance will focus these efforts in new markets.

As outlined in my previous article on CCV, I was awaiting an announcement from EZCORP to take over the entire company. I do not intend to sell my stake at this stage, as this strategic alliance opens huge potential in these new markets.

BSA Limited (BSA)

Market Cap: $60m
P/E: 6.4
P/B: 0.88
Dividend Yield: 7.1%

On the surface, BSA ticks all the boxes for value investors. Selling for 6.4x earnings and 0.88x book value, BSA is sitting on $17m of cash, has less than 50% debt to equity ratio, and hasn’t missed a dividend since they commenced paying in 2006. (management aims for a payout ratio of 50%).

Turning to the underlying business, I am going to frame my analysis of the business the same way management do, into 2 separate streams: Contracting Solutions and Building Services.

Contracting Solutions
BSA’s legacy business is centred around the telecommunications and subscription television market. As long-term contractors to Foxtel, Silcar and Optus, BSA have a strong practice in maintenance installation and troubleshooting of telecommunications infrastructure, as well as installation and setup of pay TV services. BSA also own the Mr Antenna and Mr Alarms brands. While revenue has declined since FY09, in HY11 Contracting Solutions won the national ADSL provisioning and service assurance contract for Optus (having previously only held the East Coast contract).

Building Services
In 2007 BSA branched out from their core contracting business by acquiring the Triple M group of companies, who are focused on the HVAC and Fire Alarm markets. Further acquisitions have expanded the practice, with Building services generating $176M in revenue in FY10. Building services continued to perform well in HY11, generating $120M revenue, and the order book has grown in the 6 month period ending December 2010 from 180m to 260m. I anticipate more acquisitions of smaller HVAC and Fire Panel operators over the coming years, and the currently challenging market conditions are going to create opportunities for BSA to acquire smaller competitors at great prices, with plenty of cash on hand.

Aggregate performance for HY10 saw outstanding growth with revenue up 39% and NPAT up 72%. While much of the growth I expect to see in BSA will be through the Building Services arm, Contracting Solutions are exposed to a large potential upside in the medium term through subcontracting on the NBN project. BSA already participated in stage one, winning work in Tasmania and NSW. If the NBN goes ahead in the future, BSA will be in the right position to potentially win a large chunk of the subcontracting work.

My holding horizon for BSA is forever (barring a major change to the underlying business), and I intend to continue adding to my position given the low share price. The 5% discount for dividend reinvestment gives me another reason to buy, hold and reinvest.

BigAir Group Limited (BGL)

Market Cap: 20m
P/E: 10.9
P/B: 2.34
Dividend Yield: 0%

A niche Wimax operator, BigAir operates a national network in 7 of Australia’s biggest cities. The company is geared towards delivering services to the wholesale market, leveraging the sales forces of other organisations who use BigAir services to complement their offerings. The key advantages of Wimax technology are:

1. Fast turn-on (hours vs weeks for a terrestrial connection)
2. High speeds for wireless (up to 1Gbps symmetrical)
3. Low install costs (Running fibre in built up areas costs well over $100 per metre)

Since turning cashflow positive in 2009, BigAir have been making smart acquisitions like Clever Comms (Their main competitor) and ISP operators who deliver managed internet services to the student accommodation market, such as Accessplus. While BigAir have a number of other competitors in the Wimax market, none of these operators have a national network.

For a company only selling at 11x earnings, with strong profit margins with no debt, BigAir is positioned to continue their significant growth. FY10 saw revenue growth of 17%, and NPAT growth of 50%. BGL is becoming more and more profitable, while revenue continues to grow rapidly, funding investment into more Wimax points, fuelling future growth in the business. Gross margins are in the region of 80%, now that they’ve binned the offnet business in favour of services delivered via their own infrastructure.

The fact that BGL currently doesn’t pay a dividend isn’t a major concern for me, right now the best place to invest their healthy profits appears to be back into the business. As the reinvested profits approach diminishing returns it will make sense to begin returning cash to shareholders.

BGL have just put up their mid FY11 numbers, and revenue growth has not slowed at all – maintaining their CAGR of 51%. Net operating cashflow doubled. This huge cashflow allows BigAir’s growth to be fully self-funded, while making acquisitions with a mix of stock and cash. An important qualifier is while the half year numbers account for the costs of the CVA and AccessPlus acquisitions, they do not include any of the earnings. It is reasonable to expect good earnings accretion for year’s end, which will result in significant profit growth for end FY12 once core network synergies have been realised.

One of BigAir’s major assets is their CEO, Jason Ashton. Jason owns 10% of BigAir and successfully co-founded an ISP in 1993 which was sold 6 years later for $20M.

BigAir is a company I can see myself holding forever, provided the telecoms industry’s evolution doesn’t damage their market position. They’re growing like mad, and it will eventually make sense to pay a dividend. In the meantime, BGL are a growth opportunity with significant potential and no major competition.