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Debtmatters balances its business through broking deal

• FROM: July 2006 |
• TAGS: general financial, debtmatters |
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• Debtmatters balances its business through broking deal
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Individual Voluntary Arrangement adviser Debtmatters is branching out into loan broking through the purchase of Loanmakers. This has prompted house broker Charles Stanley to increase its earnings forecasts by around 40%. Debtmatters is number two in the IVA market and it should start to generate cash this year.

Individual Voluntary Arrangement adviser Debtmatters is branching out into loan broking through the purchase of Loanmakers. This has prompted house broker Charles Stanley to increase its earnings forecasts by around 40%. Debtmatters is number two in the IVA market and it should start to generate cash this year.

Debtmatters is paying an initial £10m for Loanmakers which is a master broker that obtains leads from web-based introducers, collects together all the required information from the applicant online and submits it in the required form to the lender.

Compass Finance has taken the reverse route of buying an IVA business to add to its loan consolidation and broking activities. DebtMatters is the first quoted IVA company to acquire a sizeable loan broking business.

The business was started by two former employees of First National Bank and is based just down the road from Debtmatters so there is scope for cost savings from combining the two businesses.

There may be additional consideration payable for Loanmakers depending on performance over the next two years. The initial multiple is just over six times prospective earnings for this year and broker Charles Stanley believes that if Loanmakers achieves its targets of operating profit of £2.3m this year and £3.6m next another £7.5m will be payable in cash and shares. That level of profit should contribute to the generation of enough cash by the group to pay off the debts taken on to fund the acquisition.

It is important to understand the cash flow implications of this move. Loanmakers receives commission for the new customer loan business it introduces to the lender and these are paid soon after the business is passed on. Typically this could be around 10% of the loan amount and it retains 60% of that figure with the rest going to the company that originally found the lead. The average loan is £25,000.

This means that cash comes into the business soon after the revenue is recognised. That is a sharp contrast to IVAs where the company charges an initial fee and regular monthly fees. The revenue for IVAs is recognised when the IVA is agreed by the creditors. The person with the IVA makes regular monthly payments but it can take five or six months before they have paid off the initial fee and are getting up to date with the monthly fees. The IVA adviser gets its money before the creditors get anything. The monthly fees continue over the life of the IVA giving companies like Debtmatters a contracted flow of revenues.

All that means is that while IVAs are good long term revenue generators in the short term when the business is growing the lag between recognised revenues and cash means that cash flow is poor and the debtors figure in the balance sheet is high. By combining a loan broker and IVA the enlarged group has better cash generation even if the IVA business is still growing rapidly.

The worry is that Debtmatters may be acquiring a business that could hold back the overall growth rate of the group. Chief executive Ges Ratcliffe doesn’t believe that this is the case. He is confident that both sides of the group will continue to grow rapidly.

The main concern about Debtmatters is that it will grow strongly but not rapidly enough to hit what look like reasonably ambitious forecast targets. Any slip ups and the share price is likely to be hammered. Although trebled profits looks a tough target for this year some of this will come from the acquisition. Loanmakers has been growing rapidly and the price paid represents an expectation of it continuing to grow just as fast. It also assumes that it manages to maintain its margins. If there is increased competition this may prove difficult and although revenues may grow in line with expectations there is a possibility that profits won’t.

Chief executive and founder Ges Ratcliffe has just sold a large chunk of his shareholding at 330p a share and raised just short of £20m. This helped institutions get hold of a decent sized stake which they wouldn’t have been able to in the market because the shares are so tightly held. Ratcliffe still owns 38.1%.

A prospective P/E of around 15 falling to just under 11 next year is not high for a company growing as rapidly as Debtmatters. Debt Free Direct’s prospective multiple for this year is in the 20s and Accuma’s is around 19. Buy.

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