DLLR Dfc Global Corp (MM)

Dollar Financial’s (DLLR) fiscal third-quarter 2011 operating earnings came in at 42 cents per share, ahead of the Zacks Consensus Estimate of 40 cents per share but dramatically higher than 27 cents earned in the year ago quarter.

The operating results exclude non-recurring gains, the non-cash interest expense resulting from the adoption of ASC 470-20, and the non-cash amortization associated with the legacy cross-currency interest rate swap agreements, which are adjusted for pro forma effective income tax rates. Including these charges, GAAP net income was 41 cents per share in the reported quarter, compared to a loss of 34 cents incurred in the prior-year quarter.

Results for the quarter benefited primarily from solid performance at core business units as well as successful implementation of a business diversification strategy.

Operational Update

Total revenue for the quarter increased 21% year over year to $197.8 million, higher than the Zacks Consensus Estimate of $188 million. Consumer lending revenue increased 29% year over year to $100.7 million.

Additionally, money transfer fees grew 12% year over year to $7.4 million, pawn service fees and sales increased more than three fold to $7.4 million and other revenue increased 2.1% to $24.1 million. However, the top-line growth was partially offset by check cashing revenue that declined 1.3% year over year to $36.7 million and purchased gold sales that dipped 5.4% to $12.3 million from the year-ago quarter.

Operating expenses increased 22% year over year to $120.7 million, primarily attributable to salaries and benefits that increased 16% year over year to $46.2 million. Alongside, provision for loan losses surged 81% year over year to $18.5 million.

The loan loss provision as a percentage of gross consumer-lending revenues modestly went up to 18.4% from 16.6% in the prior-year quarter, based on the rising mix of internet-based loans.

Dollar Financial’s operating profit jumped 20.5% year over year to $77.1 million, driven by continued strong flow of incremental revenue into earnings and profitable accretion from the company’s recent acquisitions.

The company also reported adjusted EBITDA of $58.9 million in the reported quarter, which increased 22.7% year over year and 16.7% on a constant currency basis.

Evaluation of Capital and Balance Sheet

At the end of March 31, 2011, the debt structure of Dollar Financial consisted of $44.8 million of U.S. senior convertible notes due 2027 and $120.0 million of U.S. senior convertible notes due 2028.

In addition, Dollar Financial has $600.0 million of senior unsecured notes which are not due until December 2016. Thus, Dollar Financial has no immediate debt principal repayment obligations; the first potential put date being December 2012 for $44.8 million of U.S. senior convertible notes.

As of March 31, 2011, Dollar Financial had drawn £5.6 million of its £7.0 million credit facility in the United Kingdom, and had drawn SEK 273.7 million and EUR 16.5 million of its total SEK 325.0 million and EUR 17.5 million credit facilities in Scandinavia, to fund its working capital needs.

Outlook for Fiscal 2011

The operating earnings projection is in the band of $1.54–$1.57 per share, revised from the previously issued guidance of $1.47- and $1.55.

Including the effect of the additional 67 million common shares issued in April 2011, the company’s revised operating earnings per share guidance equates to $1.47-$1.50 per diluted share.                           

The guidance considers an expected effective income tax rate from operations of 37%.

The outlook for adjusted EBITDA has also been revised to the range of $226–$229 million from the prior range of $215–$220 million for fiscal 2011.

Our Take

We expect solid liquidity position, exposure to a somewhat recession-proof sector and cost containment measures to drive growth in future. Going ahead, the company is also expected to grab the opportunities through acquisitions and deploy the available funds in a manner that will further enhance future earnings.

We maintain our Outperform recommendation on Dollar Financial. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

Headquartered in Berwyn, Pennsylvania, Dollar Financial provides a range of consumer financial products and services to under-banked consumers. It competes with Cash America International Inc. (CHS).

 
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