This 'materially undervalued' share could be worth 50% more

With the bull run in equities still very much intact, there are fewer truly cheap shares around. Morses Club is one, according to some.

Jeremy Grime, respected financials analyst at broker finnCap, is a long-time cheerleader of the doorstep lender. He thinks the shares, which hit a record high Thursday after a strong 12 months, could be worth 50% more.

"This share will cease to be cheap when the market sees growth being delivered from new initiatives," he explains. "In a market up 16% over the last 12 months the downside is protected by low leverage and a yield while the upside is 50%."

The 130-year-old firm took the bold move of listing just seven weeks before last summer's EU referendum. And, despite sentiment for IPOs at its lowest level since 2009, it went ahead, backed by some high-profile investors including Schroders, Miton and George Soros.

Morses came to market on 5 May, raising £68.5 million at 108p per share. It was a baptism of fire, though, and by the time the Brexit vote came around more than a fifth had been wiped off its market value.

However, since that low of 84p, interest in the company has returned and, after outperforming the market over the past few weeks, they now trade at 136p, driven 4% higher Thursday by maiden full-year results as a listed company.

Revenue was up 10% to £99.6 million in the past 12 months, with adjusted pre-tax profit of £17.7 million up 5% from £16.8 million. It recorded net loan book growth of 8% to £61.2 million.

Already the second-largest home collected credit (HCC) lender in the UK behind Provident Financial, customer numbers increased 9% to around 216,000. More of those customers are repaying their loans in a timely fashion, too.

Morses says its agents visit customers' homes in order to assess them for credit, before visiting on a weekly basis to collect those loans. "The agents are part of the community that they serve so have a great deal of empathy with the customers," chief executive Paul Smith told us today.

The year to 25 February 2017 also signalled the first with dividends incorporated, with a proposed final dividend of 4.3p added to its interim payout of 2.1p. Paying 59% of the company's adjusted after-tax profits to shareholders - at the top end of management's long-stated 50-60% aim - gives a generous yield of 5%.

"I think that reflects our confidence in the businesses prospects," said chief financial officer Andy Thomson.

Thomson himself, the company's top number cruncher for eight years, owns 4.38% of the company. "I find the value of my shares and the dividends I get off them a valuable source of income and I intend to do my utmost to protect that," he says.

It's a highly acquisitive company, having snapped up a number of HCC businesses in the year, which has helped boost Morses' customer book and number of agents.

It also acquired Shelby Finance in January 2017, "which was a much more strategic acquisition" and gave the company the opportunity to enter a new part of the market and reach out to consumers who have impaired credit ratings but do not use HCC products.

Smith, who used to be managing director at former telecoms company Phones 4u, says Shelby gives Morses the immediate benefit of having a full Financial Conduct Authority (FCA) license to operate in that space, as well as the requisite technology platform.

"We were able to acquire them for a fraction of the cost of building our own platform [and] having to apply for [an FCA license] from scratch."

Further acquisitions are planned. "The landscape that we see going forwards is that there may be some other HCC businesses that we can buy, or buy the assets of, and we continually monitor the market, but we also now have the opportunity to look at buying out other online operators."

Smith says the ambitious firm also fancies a move into the pre-paid cards and credit cards market, as well as switching and banking services.

Its focus on using technology rather than paper gives it an advantage, too, Thomson argues, as its agents already need to go through all FCA-approved processes before they can make that loan.

This will be the same story for the two other major players, but most of its 400-odd smaller competitors "are probably walking around with pads of paper and a pen and can do what they like almost".

In time the FCA will clamp down on that and make things more onerous, and Morses is "very well positioned to take on that opportunity in the medium-term".

Morses has other fans in the City, with Panmure Gordon analyst Shailesh Raikundlia believing the company "remains materially undervalued". Return on equity of 27.2% compares to peers at 17%, he continued.

A price/earnings (PE) multiple of 11.7 times is attractive and a price/tangible book value (P/TBV) of 3 compares favourably with Provident Financial's 5.6. Raikundlia reiterates his 'buy' recommendation and 150p target price.

Numis Securities, meanwhile, upgraded its target price by 15% to 149p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.