The recent release of the Federal Government’s Consumer Credit Protection Amendments bill has rightly caused alarm for Cash Converters shareholders.
The premise of this amendment is to propose capping the fees for small amount payday lending, which would in effect make the Australian payday loans part of the Cash Converters business unprofitable. Due to the contribution payday lending makes to the Cash Converters business, the share price has been promptly trashed. Indeed, major partner EZCORP has pulled their original deal to raise their stake in CCV from 33% to 53%.
If the sort of capping that is being suggested is implemented, Cash Converters’ bottom line would be severely damaged. Of the FY11 EBIT of $40.2M, $24.4M is as a result of the personal loans business and $12.3M is as a result of the cash advance business. And while these outcomes mainly affect the Australian Market, the UK market’s loans business is still in its infancy.
Given these developments, and in spite of the fact that legislation is yet to be implemented; I decided the Risk Off approach was the best way to avoid permanent loss of capital, and exited my position in Cash Converters.