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CKKIF.PK (ASX: CCV) - Cash Converters International Pty Ltd

|Includes: Cash Converts International Ltd. (CKKIF)

Will Cash Converters be a cash converter for your portfolio?

Cash Converters International (ASX:CCV) operates as a retailer of second-hand goods and a supplier of financial products. The core business of Cash Converters is the ownership and franchising of retail stores and financial services stores. Cash Converters has more than 130 Cash Converters stores throughout Australia and over 600 stores in 21 countries worldwide.

In 1984, Cash Converters started as a single store in Perth, Western Australia. It was founded by Brian Cumins and a group of partners whose vision was to transform the humble second-hand store into a chain of professional retail outlets. The company is listed on both the Australian Stock Exchange and the London Stock Exchange.

The company franchises its store operation with the support of national advertising and marketing programs. The franchise business is involved in buying and selling second-hand goods for cash. The business has recently repositioned itself by significantly changing the look and feel of its stores. This is expected to make the company more appealing and contemporary.

Cash converters financial product offerings include:

  • Cash advance loans
  • Personal loans
  • Pawn broking

Does this business have a sustainable competitive advantage?

Cash converters competitive advantage comes from:

  1. - Strong brand awareness within the community
  2. - Standardised systems across their network
  3. - Appeal to a wide cross section of the community
  4. - A simple, low cost business model

Opportunities for Cash Converters more so than competitive advantages include:

  • Target to grow their UK store base from 200 to 400 stores. UK is already their largest store
  • Current difficult economic conditions and growing unemployment globally is likely to provide a source of new customers both on the retail and finance sides of the business

What are the risks facing this business?

Some of the risks facing Cash Converters are:

  • Limited growth prospects in Australia due to a very mature lending market.
  • Bad debt provisions could increase due to the current economic environment globally
  • Competition from the growing presence of online retailers

Is it run by able and trustworthy management?

Management's strategy appears to be to grow the business organically utilizing profits from the mature Australian business to launch new stores and financial products around the world. This strategy does appear to be draining free cash flow. My calculations show that the company has recorded a negative cash flow for the past two and a half years ie 2010FY, 2011FY and 1st half 2012FY.

Cash converters have a long serving and stable and management team in place. Cash Converter's managing director Peter Cumins joined the group in 1990. He is the brother of Brian Cumins, the company's founder. And, the company's chairman Reginald Webb was appointed Chairman in January 2005.

The business is run with a modest net debt to equity ratio of 10%.

Is it trading at a bargain price?

Rank 2011 Actual Valuation Today's Share Price Margin of Safety 2012 Forecast Valuation 2013 Forecast Valuation 2014 Forecast Valuation
Gold 3 $0.66 $0.68 -11.48% $0.61 $0.64 $0.60

*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

Summary

In summary, Cash Converters is a reasonably profitable and strongly branded company with a clear growth strategy in place. It has experienced management who are working to grow and diversify the revenue of the business. The company has faced negative cash flow in recent years as a result of their growth agenda. The company appears well positioned to take advantage of growth opportunities in the UK and other countries around the world.

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.