As someone that is always on the lookout for a decent recovery prospect, I have recently been inclined to take a look at CPP Group, a UK based provider of products and services that span the spectrum of financial services and insurance markets.
Whilst that in itself may fail to conjure up much on the attraction front, the company’s Trading Update from January of this year may well do, which revealed that CPP is well on track for more notable progress after emerging from some barren years. As a rule, I don’t usually warm to companies that have endured serious issues, unless there is evidence of a real turnaround in the fortunes and prospects and to that end CPP would appear to fit the bill. Although founded many years earlier the company only came to the market in 2010 and for a brief time was something of a high flyer, the shares achieving at one point a market cap of more than £350m.
That was however, before it encountered a number of serious issues and problems that resulted in some regulatory breaches, culminating on more than one occasion brushes with a near falling into administration. Speaking with CEO Jason Walsh who was appointed post the troublesome events and who was part of a new board ushered in, I have been able to learn of its past problems, along with more importantly, where the business is now at.
Walsh took over the helm at the company back in 2016 and tells me that during that time he has been very much focused on steering the business through a transitional period focused on rebuilding its prospects and putting the historic issues behind it. The recent market update was certainly positive, pointing to a beating of forecast numbers which subsequently saw the shares surge from £2.80p to £5.00p which, following on from previously reported and positive Interim results, has put the company back in the market eye after its years of largely being in the wilderness. Having at one point seen 70% of its revenue and profit generated from within the UK, the regulatory issues resulted in the business having to focus elsewhere and rebuild across other territories for a return to the growth path. As part of a much needed recapitalisation process Phoenix Asset Management invested across the business in 2015, joined by Schroders headed by the much respected Andy Brough, both of whom continue to hold their major stakes today.
Having previously been listed on the main market CPP then stepped down to the AIM and following the board clear out, Walsh embarked on the much needed change. “Over a period of three or four years I set about really right sizing the business” says Walsh, “that meant redesigning the operational model from having a fat HQ to something much leaner that is more engaging and supporting”.
Since selling its York HQ to Gear4Music and relocating to Leeds, Walsh says that they have concentrated on strengthening the balance sheet and delivering improving EBITDA as the new board has provided the support to its teams located across the globe to execute on its growth strategy. Walsh believes that CPP has now reached an inflexion point and that having kept their heads down and been largely dormant, they now feel that it is time to raise their profile and create interest. In terms of CPP’s actual business, this sees it focused on four core areas, those being card protection, mobile phone insurance, extended warranty and health/life insurance. There is also a product offering across travel, but this, Walsh says is very small in comparison to the other offerings.
The CEO says that card protection has been and continues to be a key driver and this provides for reliable recurring revenue through annual renewals.
However, much of the company’s growth and future prospects appear to come from the likes of mobile phone insurance with India proving to be a key market for CPP.
Walsh explains that they are partnered for example with a major player there in the area of mobile phone purchases and the CPP offering is a one off payment for extended warranty. These typically run from one, up to three years in conjunction with a loan that has been taken out for the purchase of the phone. CFO Oliver Laird is keen to point out that with its extended warranty schemes the cash is upfront and that cash generation is very positive which works well with the annuity based income from the card protection.
He also says that CPP is now really seeing the benefits of Walsh’s restructure plan coming through, particularly after a period of investing in its Indian operation.
Speaking of the business model Walsh says,“everything that we do is through partners and partnerships, so we don’t market our products ourselves. Within that though, we are active in cooperating with these partners in developing new products and services and we also provide training in specific areas for their employees".
All customer communication is handled by CPP on behalf of the partner which sees it providing a complete outsourced operation, from taking the first call to a sales process and then onto renewals. One thing I am keen to learn, is the level of exposure to perhaps just two or three major partners which can often prove problematic, particularly if a key relationship breaks down. “We actually have over 200 partners across the globe,” Walsh says, “but in each region such as India, China or Turkey we probably have two or three larger customers we work with”.
Given the global presence and growth metrics the customer risk doesn’t appear to be of concern, particularly as it enjoys an extensive and growing list and where the company has performed well during the pandemic. Having once seen the UK providing for 70% of all revenues as previously mentioned, CPP now has India accounting for that same figure as new and growing business is now a key driver and demonstrates the potential on offer. Aside India the company continues to make very significant progress in China where it has recently built and launched a new travel disruption product titled F-Lite, which is already winning industry awards. Although clearly a global focused operation the UK still plays its part and CPP has over the last year secured a number of high profile deals with household names such as the RAC and Gallagher, which further strengthens the rebuilding of its position. The full year results out later this month may be worth taking a closer look for further evidence of this turnaround and the prospects for ongoing growth and increasing cash generation.
Following the Interim results announced last year Investec forecast full year 2020 revenue of £130m with EBITDA of £6.2m and pre-tax profits at £3m.
But, in the Trading Update the company said that it now expects revenue to be circa £140m after a positive performance.
Equally, EBITDA is now anticipated to come out in the range of £7.1m and £7.3m which suggests that things are very much on track here.
The net cash position should also be worth focusing on come the results, as after debt being taken into consideration Broker Liberum had pencilled in a £14.9m figure with the gross number likely to be circa £21m. The current market cap of CPP at todays share price of £4.92p is just £45m with cash making up for a sizeable chunk of that and potentially making for the shares looking cheap, despite having already risen considerably since the January update.
More should become apparent come those results, where it is worth my keeping a close eye on progress.
Comments