This stock builds scale in the right places

This week's Hot Stock, courtesy of James Lennon from Fat Prophets, is Flexigroup.

Flexigroup (ASX:FXL)

Key statistics:

Closing share price 14-9-16: $2.170

52-week high: $3.100

52-week low: $1.705

Most recent dividend: 7.250c

Annual dividend yield: 6.65%

Franking: 100%

To say there have been some ups and downs for FlexiGroup since the stock arrived on the ASX a decade ago is something of an understatement. The leasing and finance group listed with some fanfare about a year before the GFC, after which reality set in rather abruptly.

While the share price rallied tenfold after the GFC, the last two-and-a-half years have seen another significant de-rating from lofty levels, with the company seeing increased competition from banks. Investors have also been unsettled by disruption to senior management.

We, however, believe the tide is turning with an improved earnings outlook following a series of restructuring initiatives. This has seen the divestment of non-core, low-margin businesses, while core operations have been boosted by a meaningful acquisition.

The management team is in much better shape, with strategic direction also being shaped by the chairman and co-founder. The company has also sought to diversify its geographical reach, a process that has been supercharged by the acquisition of Fisher & Paykel Finance.

FlexiGroup is also looking to other avenues for growth, having taken a minority stake in fintech lender Kikka Capital for $2 million in May. Next month it plans to unveil a new product designed to appeal to "millennial" consumers who are likely to be more open to leasing household items.

Such a nimble and technologically aware approach is also delivering significant new business wins. Last month FlexiGroup announced that it had won a deal with Flight Centre to offer the travel agency's customers interest-free loans. While it is difficult to say at this stage how big an earnings contribution this will make, it will be incrementally positive.

From a valuation perspective the shares are modestly priced in our view, at around nine times 2016-17 earnings, with a dividend yield approaching 7%. This, combined with a better technical set-up, provides us with increased confidence that a key inflection point in the share price has been reached.

James Lennon is a senior analyst at investment research and funds management house Fat Prophets. Click here to receive a recent Fat Prophets Report.

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