We retain our Neutral recommendation on DFC Global Corp. (DLLR), factoring in the downward trend of cash checking revenues coupled with escalating operating expenses and increasing debt burden.
The company’s revenues from fees associated with check cashing have been declining steadily, which further dipped by $3.2 million in the third quarter. This is a matter of concern as it is an important contributor to the company’s total revenues.
Additionally, DFC Global’s deteriorating cash and cash equivalent position is a reason for concern, especially given the recent initiatives undertaken to issue a large number of senior notes and increase in its debt obligations.
With the issue of senior notes, the company increased its debt burden by $230 million. This is expected to have a negative impact on its debt-to-capital ratio that currently stands at 65.72%. This is higher than that of its peers Cash America International, Inc. (CSH) and SS&C Technologies Holdings, Inc. (SSNC), having a debt-to-capital ratio of 27.95 and 7.76%, respectively.
On the positive side, the company witnessed robust growth in the single-payment loan product activity and the UK consumer lending business, benefiting from an increase in pawn-lending activities, which consisted of loans on collateralized gold jewelry.
DFC Global has also been proactive on the acquisition front, diversifying in its sectors of products and geography for years. It has completed several acquisitions in furthering of its objective to expand and diversify from its core retail financial services business in Canada, UK and the U.S.
The company’s list of recent acquisitions also includes 8 stores in Madrid under the banner of Super Efectivo S.L. as well as 6 franchised stores in Canada. The acquisition of Super Efectivo resulted in an increase in the company’s goodwill by $5.4 million, against a payment of $9 million. The company also initiated many small acquisitions in UK and Canada.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investors’ confidence in the stock as well as maintaining creditworthiness in the market. DFC Global scores strongly with the rating agencies.
Recently, Standard & Poor's ("S&P") Ratings Services assigned their issuer credit ratings (:ICR) of “B+” on the company with a stable outlook. Concurrently, the credit rating agency also allotted “B+” rating to the company’s expected $200 million notes issue.
DFC Global currently retains a Zacks #4 Rank, which translates into a short-term Sell rating.
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