European-focused credit collection specialist Arrow Global Group (LSE: ARW) has flown more than 9% in early trading after posting a 28.4% increase in profit after tax to £20.5m in the nine months to 30 September.
On target
This will come as a welcome relief to investors after a dismal year which has seen the share price fall 54%, while the stock is also down as measured over five years. So is this just a relief bounce or does it point to an extended recovery?
Arrow’s management hailed a strong group operating and financial performance. Highlights included an 18.2% increase in core collections, driving a 28.8% increase in adjusted EBITDA, while underlying profit after tax increased 10.2% to £42.9m.
Bullseye!
The group also hit the mark with an underlying 33.4% return on equity over the last 12 months, while an improved underwriting performance increased to 104% of original forecast.
Arrow’s investment business also performed well with record organic portfolio acquisitions of £200m, up for £155m in Q3 2017, while third-party asset management and servicing business income increased 25.1% to £63.3m. Balance sheet management looks prudent.
All of a quiver
I wrote in August that Arrow has looked a tempting buy for some time, so I am pleased to see the stock flying true. The £393m company now offers a stunning forecast yield of 6.4%, with cover of 2.9.
Earnings per share (EPS) growth has been strong since it joined the main market in 2013 and is expected to continue with 12% growth this calendar year and 22% in 2019. By then the yield is forecast to hit 7.9%. One warning: a recession could make collections harder, and City forecasters reckon operating margins will fall from 33.2% to 20.2%. However, trading at just 5.3 times forecast earnings, these worries look to me like they are in the price.
Power of 3i
You don’t find many companies trading on such a cheap valuation but I’ve just discovered one on the FTSE 100. Private equity and infrastructure specialists 3i Group (LSE: III) stands at just 5.7 times earnings, and even though this is forecast to rise slightly to 7 times that is still a pretty tempting discount.
The £8.4bn group, which focuses on northern Europe and North America, has seen its stock fall 9% in the past year, although it has still grown 127% over five years. It also offers a decent forecast yield of 3.7%, with cover of 3.9.
Cash is King
3i buys businesses with the aim of improving them and then selling them for a profit. As a result, profits vary depending on the timing of acquisitions and sales, although Q1 started well, with the group generating total cash of £868m, principally from the £835m million received from the sale of Scandlines in June, but with £535m reinvested.
Its balance sheet also looks solid, with net cash of £638m at June 30, before spending £213m on its full-year dividend in July.
As I wrote earlier, EPS are forecast to fall in the year to 31 March 2019, by 18%, then another 1% in the year after that, but that is the nature of the group. Both stocks are risky, but long-term investors may well reap the rewards.
