Anexo provides legal services to poor people in both vehicle insurance and related claims, and housing disrepair. Customers have some need for what it can provide, as they cannot finance for themselves. On the other hand Anexo has little benefit from cost minimising so acts to make insurance, cars and housing more expensive for everyone.
The business originally started as a litigation and claims processor for the poor non-fault motorist involved in a road traffic accident (RTA). It offered credit hire and legal services around a claim, many of which are for the more marginalised members of society such as delivery drivers with their mopeds.
Anexo acted for the non-fault driver and seeks to reclaim from the other party’s insurer. To make itself more appealing than other Ambulance Chasers it has the vehicle hire side as well as the legal.
But this is capital intensive as Anexo has to have vehicles to provide their USP and the claims process and eventual reclaim from the other party can take a long time. (Over a year). So the bigger Anexo grew the more it had to invest in the working capital and vehicle assets of the business. So growing the business has meant taking on debt and more debt which in the current interest rate environment is not a winner.
To be fair Anexo does provide a benefit for society in that it screens claims before taking them on. Thereby removing a certain level of frivolous claims from the system. Anexo is very good at this and has a win rate of well over 90% in the cases it takes on.
Anexo has also gotten involved in some of the Dieselgate claims and whilst these have some big numbers involved (relative to the business size, £7m from VW). These are spread over thousands of plaintiffs. I understand the VW claim ended up being circa £60 per person. And actions like this are very much one offs and not a regular business model.
Relatively new is the Housing Disrepair (HD) business stream. Anexo funds and runs claims for tenants against landlords to enforce that flats are fit for human habitation.
This section has a number of benefits for Anexo. The gross margin on these claims is much higher. Possibly double. The payment periods are much shorter, possibly half the time. And the requirement for funding is much less as there is no vehicle hire part to the transaction.
Also given the complete inability of any political party to sort out housing this is imho a potential growth area.
Anexo is clearly trying to push this part of the business and not grow the RTA side of the business. In fact it has been turning down RTA opportunities as it seeks to drive down the debt levels.
The business has been making 14-16p EPS for the last few years. It is in a transition from RTA to HD. It is looking to reduce its high debt levels and is projected by the broker to do this.
Management own over 30% of the business so have a general alignment with shareholders. DBay has 28.5% so the Directors have someone looking over their shoulders.
The company has recently issued an in line Trading Update.
So whilst I am not expecting in the short term a great increase in profits I do think there is a reasonable expectation of much higher quality earnings and a reduction in debt.
From last year’s interims the Company had net tangible (genuine) assets of £154m and the market cap £71m. As the debt reduces and I believe it, will as the RTA side reduces, and the Company continues to make profits this disparity will be more obvious.
PE is circa 4.4 which I would expect to grow as the quality of the earnings improves.
In the medium term as the debt levels are improved the company ought to be able to both invest bit also better reward shareholders. Given this I think there could be an upside on both a ratio expansion. If the PE moves to a lowly 7 you get over a 50% gain, plus a decent opportunity for a growth in profitability.
For those with a medium term timeline this could be a rewarding investment. Though in all fairness it should not be expected to double overnight.
I hold some. DYOR.