By Robert Miller | Portfolio Manager at NAOS Asset Management
What is the stock?
CML Group Ltd (ASX: CGR) is a non-bank provider of factoring services to SME clients. Market capitalisation is $50m.
How long have you held the stock?
Have held it for over three years. We first started buying in early 2014.
What do you like about it?
A basic 101 in factoring is that a company will effectively sell their invoices off and receive 60-80% of the proceeds today. The balance of funds is received when the customer pays the invoice less any fees. A company would use this service as an alternative to bank funding, which might be either too restrictive or unobtainable. The factoring service becomes a very consistent and is an effective and nimble use of funding for SMEs.
CML Group, as the factoring business purchasing the invoices forms strong relationships with SMEs and takes numerous measures to manage credit risk, including ensuring the invoices are purchased for more than they pay. Furthermore, the sectors in which CML has exposure are diverse and the invoices to be paid are from high credit quality customers (e.g. ASX100 customers).
CML Group is a capital light business model and has consistently paid out fully franked dividends.
How is it better than its competitors?
CML Group has consolidated some smaller players and has gone about systematically improving the credit quality and margins earned on the acquisitions. CML is the distant number two player (in terms of size) to Scottish Pacific (ASX: SCO), which is a consolidated group out of private equity. We believe that CML Group has a better margin profile and better proportional growth opportunities.
To put it in perspective, the market is extremely large and the biggest competitors are the banks who are continually moving away from providing a good service to SMEs due to their internal protocols/restrictions.
What do you like about its management?
The Managing Director and Chairman are founders of the business and remain significant shareholders. Relationships are key within the industry and CML Group has attracted seasoned professionals from the factoring industry who have good networks and a successful history of growing then selling factoring businesses.
What is your target price?
Our current target price is above $0.60 vs current share price in high $0.30’s.
At what point would you sell it?
Either around our valuation or if there was a significant deviation from the initial investment thesis.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
Total shareholder return over the past 12 months is circa 50%, including two dividends (ex franking). During that time it has been a top 3 contributor to one of our portfolios.
Where do you see value?
We see value in numerous areas.
- CML Group’s ability to drive further margin improvement from its recent acquisitions.
- The sustainable market growth is a good tailwind.
- The company has reached the scale where it can now use bank debt funding to purchase invoices. This means a transition to significantly lower funding costs for CML Group over the next 12 months, which falls straight through as profit.
- The scalable nature of additional top line growth. Current EBITDA margins are circa 50% and we estimate incremental margins are circa 70%.
- The company is exploring opportunities into logical adjacencies such as equipment finance funding which we feel makes sense given the management experience.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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