Disclaimer: We are shareholders of Morses Club Plc
If Card Factory didn’t repel you last time, we
bet this one will. But if you are like us, you know that it is precisely what
opportunity smells and looks like. Take a deep breath and let us introduce you
to Morses Club, you won’t be disappointed.
Elevator pitch:
Morses Club is the UK’s second largest provider of home-collected credit (“HCC”) with a market capitalization of £98m. It issues loans from £200 to £1,500 for a duration of 35 to 52 weeks at 75% to 95% interest rates to customers that typically have no fixed jobs, earn less than £15k per year (mostly from government assistance) and therefore have no access to mainstream lending. Key motives for taking out a loan include Christmas, holidays and unexpected household expenditures when an appliance/car/good breaks down. Having spent a significant amount of time working on the industry, we believe that HCC is profoundly misunderstood by investors and incorrectly assimilated to payday lenders and loan sharks. The cold truth is that, while unfortunate, HCC is a necessity for many households and most of them, as the regulator says in its High Cost Credit Review, “would be significantly worse-off if this line of credit was unavailable”. In addition, while headline interest rates look high, they must be compared to the impairment rate (c.23%) as well as the commission paid to agents (c.21%). All in all, well-run HCC providers earn c.20% return on capital, which, while good is hardly a sign of price gouging. This mismatch between investor expectations and reality therefore provides an extraordinary opportunity to buy a company that i) is cheap on pre-COVID metrics (6x P/E for the core HCC business, excluding the digital division), ii) will be a beneficiary of the post-pandemic rise in unemployment and iii) will see its #1 competitor Provident (44% market share) shut-down, creating a credible path for Net Income to more than double within 2-3 years. Morses is trading at less than 3.0x our “pro forma” 2023 earnings, which paves the way for a 3-bagger in the next 2 to 3 years (historical range since IPO was 9x - 12x). Keep in mind that these numbers do not include the optionality from the digital division (breakeven targeted in 2021) where Morses has a clear path to cross sell its existing HCC customer base and the potential to expand its addressable market by a wide margin. Lastly, insider ownership stands at 39.2%, providing for a good alignment of incentives (36.0% come from Morses’ reference shareholder – the Hay Wain Group – who has one seat on the board and 3.2% from the Executive Team). Also, Morses’ COO purchased £150k of shares four weeks ago, a clear sign of the things to come in our view. Obviously, such a valuation disconnect would not happen if there wasn’t material concerns around the industry/company. We take a look at both of the market’s biggest perceived risks (regulation and rising refund claims) and show why we think they’re overblown. Even if we are wrong and these risks materialize (highly unlikely in our view), we think that a permanent loss of capital would be very limited.
