DLLR Dfc Global Corp (MM)

We are downgrading our recommendation on DFC Global Corp. (DLLR) to Neutral from Outperform as the company remains apprehensive about its high operating expenses and tightened lending. The company also faces risks related to decline in cash checking revenues, insufficiency of cash flows against debt obligations and its increased international dependence.

DFC Global has been diversifying in both the sectors of products and geography since years. The company purchased Purpose to strengthen its position as a leading provider of internet loans across U.K. The company acquired Finnish internet loan provider Risicum Oyj to further expand and fortify its presence in Finland and Sweden.

Among the other positives, DFC Global serves a basic need of lower-and middle-income working-class individuals, who represent the largest part of the population in the countries where it operates. DFC Global envisions on becoming one of the leading providers of financial services to the under-banked and unbanked consumers (the ALICE demographic or asset limited, income constrained, employed).

On the flip side, DFC Global earns most of its revenue from check encashment and consumer lending activities internationally. The company’s foreign subsidiaries accounted for 81.8% of the total revenues during fiscal 2011. Rising tax rates in the countries where it operates are expected to somewhat drag down earnings in the upcoming quarters.

The company derives a significant portion of its revenues from fees associated with cashing payroll, government and personal checks. The increasing penetration of electronic banking services into the check cashing and money transfer industry is thus inducing the decline in revenues from fees associated with check cashing.

We remain concerned if the cash flows and capital resources are sufficient to fund the company’s debt service obligations and to satisfy the working capital and other liquidity needs. The company’s cash balance is on the decline while, long term debt is increasing.

DFC Global’s fiscal fourth-quarter 2011 earnings came modestly ahead of the Zacks Consensus Estimate on the heels of solid performance at its core business units, successful implementation of business diversification strategy and strategic investments.

Looking ahead DFC Global expects to generate revenue in excess of $1.0 billion for 2012 and projects operating earnings in the band of $2.00–$2.15 per share.

The Zacks Consensus Estimate for fiscal first-quarter 2012 is 49 cents per share. For fiscal 2012 and 2013, the Zacks Consensus Estimates are, respectively, $2.11 per share and $2.64 per share.

The quantitative Zacks #2 Rank (short term Buy rating) on the stock indicates upward pressure on the shares over the near term.

Formerly known as Dollar Financial Corporation, DFC Global Corp. is headquartered in Berwyn, Pennsylvania. DFC Global 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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