FSA - equity research initiation report

BBY Limited
Financials
FSA A$0.38FSA Group Limited
Initiation of Coverage: Australia’s largest consumer debt solutions provider
with a free call option over growing non-prime home loan lending business
24 November 2010 S&P/ASX 200 23 November 2010 XJO George Gabriel, CFA
+61 2 9226 0091
ggg@bby.com.au
Recommendation:
BUY
Investment Summary
FSA Group Limited (FSA) is Australia’s largest consumer debt solutions provider. It has
expanded its range of debt solutions to include a range of direct lending services,
namely consumer non-prime home loan lending and small to medium enterprise (SME)
factoring finance. FSA’s growing annuity revenues comprise debt administration fees and
interest income. Given undemanding FY11F PE of 5.7x, investors receive a free call option
over FSA’s planned growth in its non-prime home loan lending portfolio from A$200M
(current) to A$600M (by FY13F). As funding markets improve, we believe FSA is well placed to
realise its growth ambitions. We recommend investors BUY FSA. Our base case 12-month
share price target of A$0.49/sh (in line with our DCF valuation) does not incorporate any
upside from home loan portfolio growth. However, we estimate that each A$100M loan
portfolio growth translates to at least A$0.055/sh shareholder value accretion.
Key investment considerations are:
Valuation is attractive, with FY10 trailing PE of 6.2x, FY11F PE of 5.7x, and DCF valuation of
A$0.49/sh.
Growing market share in core debt agreement segment. We expect FSA to increase its overall
market share from 51% in FY10 to 55% in FY14F as its competitive advantages of a diversified
debt solutions product offering, access to capital and scalable systems drives outperformance.
Scalable growth options include the non-prime home loan lending and SME factoring finance
businesses.
Non-prime home loan lending market upside is evident given diminished competition
post-GFC combined with evidence of latent customer demand, namely that non-prime RMBS
balances have declined from a 2007 peak of A$7.5bn to A$2.4bn currently.
An improved funding market outlook increases FSA’s prospects of accessing expansion capital to
support growth in its non-prime home loan lending business.
Annuity incomes growth outlook. Annuities were 54% of FY10 total revenues and we forecast they
will increase to 61% by FY13F.
Five year return on incremental capital invested of 20%.
Source: FSA Group Limited
Number of Shares:
138.3M
Market Capitalisation:
$52.5M
Free Float:
45.3%
12 month high/low:
$0.44/ $0.28
Average monthly turnover:
$0.5M
All Ordinaries Index:
4,714
% All Ordinaries:
0.00
GICS Industry Group:
Diversified Financials

b
BBY Limited 24 November 2010 2
FSA GROUP LIMITED
Table of Contents
FINANCIAL SUMMARY ......................................................................................................................................................3
INVESTMENT SUMMARY...................................................................................................................................................4
KEY RISKS..........................................................................................................................................................................5
BUSINESS OVERVIEW.......................................................................................................................................................6
SERVICES SEGMENT ........................................................................................................................................................7
HOME LOAN LENDING SEGMENT .................................................................................................................................16
BUSINESS SERVICES & LENDING SEGMENT ..............................................................................................................23
VALUATION AND EARNINGS ANALYSIS.......................................................................................................................24
KEY MANAGEMENT.........................................................................................................................................................27
BBY CONTACTS...............................................................................................................................................................29

b
FSA GROUP LIMITED
FINANCIAL SUMMARY
FSA Group Limited Share Price (A$) $0.38 Mkt Cap (A$M) 53
Year ending June 30 A A F F F
Profit & Loss (A$M) 2009A 2010A 2011F 2012F 2013F
Total Revenue 50.1 50.8 56.6 63.8 69.5
Growth (%) 38.0 1.4 11.5 12.7 8.8
EBITDA 14.6 13.6 16.5 21.4 24.2
Growth (%) 215.2 (6.7) 21.0 29.5 13.1
Dep'n and amort'n (0.7) (0.8) (0.8) (0.9) (0.9)
EBIT 13.9 12.9 15.7 20.5 23.2
Net interest expense 0.0 0.0 0.0 0.0 0.0
PBT 13.9 12.9 15.7 20.5 23.2
Growth (%) 230.0 (7.4) 21.6 31.0 13.4
Tax (3.9) (3.7) (4.7) (6.1) (7.0)
NPAT Underlying attrib. 8.8 7.5 9.2 12.5 14.3
Growth (%) 252.0 (8.1) 19.4 31.0 13.4
NPAT Reported 8.8 7.5 9.2 12.5 14.3
Normalised NPAT 8.8 7.5 9.2 12.5 14.3
Ord Shares 129.2 129.1 138.3 138.3 138.3
Options 8.2 0.0 0.0 0.0 0.0
Fully Diluted 123.6 138.3 138.3 138.3 138.3
FD Wgted Av Shares 123.6 129.1 138.3 138.3 138.3
Cashflow (A$M) 2009A 2010A 2011F 2012F 2013F
Customer receipts 54.6 41.2 56.6 63.8 69.5
Supplier Payments (58.6) (38.1) (40.1) (42.5) (45.3)
Net interest paid 6.5 0.0 0.0 0.0 0.0
Taxes Paid 0.4 (0.7) (4.7) (6.1) (7.0)
Net operating cash flow 2.9 2.5 9.5 12.4 15.0
Capex (0.3) (0.2) (1.0) (1.0) (1.2)
Net investing cash flow (54.8) (59.6) (7.7) (17.6) (11.1)
Dividends paid 0.0 0.0 0.0 0.0 0.0
Net financing cash flow 52.8 51.4 12.7 16.5 9.1
Net Change in cash 0.8 (5.7) 14.5 11.4 13.0
Net cash at end of period 19.7 14.0 28.5 39.8 52.9
Free cash flow 2.6 2.3 8.5 11.4 13.8
Balance sheet (A$M) 2009A 2010A 2011F 2012F 2013F
Cash 19.7 14.0 28.5 39.9 52.9
Receivables 22.2 32.6 44.1 51.5 57.2
Inventories 0.0 0.0 0.0 0.0 0.0
Current assets 42.9 46.8 72.8 91.6 110.4
Tangible Assets 0.7 0.5 0.6 0.7 1.0
Investments 145.6 201.7 208.4 225.0 234.9
Goodwill 3.8 3.2 3.2 3.2 3.2
Total assets 210.8 276.9 309.8 345.3 374.2
Payables 11.8 12.8 22.0 26.6 30.1
Current Term debt 2.0 3.4 3.4 3.4 3.4
Long term debt 9.8 11.9 19.7 21.4 22.7
Non-Recourse Financial Liabilities 148.6 194.5 201.3 217.8 227.7
Total liabilities 178.7 232.2 255.9 278.8 293.5
Total Shareholder Equity 32.1 44.7 53.9 66.5 80.7
Investment summary 2009A 2010A 2011F 2012F 2013F
NPAT reported 8.8 7.5 9.2 12.5 14.3
NPAT Underlying 10.0 9.2 11.0 14.3 16.3
EPS Reported 7.1 5.8 6.6 9.1 10.3
EPS Underlying 7.1 5.8 6.6 9.1 10.3
EPS Growth (%) 273.5 (18.2) 13.7 37.0 13.7
P/E Underlying (x) 5.3 6.2 5.7 4.2 3.7
Dividend (¢/sh) 0.0 0.0 0.0 0.0 0.0
Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0
Yield (%)
Franking (%) 0.0 0.0 0.0 0.0 0.0
Key Ratios 2009A 2010A 2011F 2012F 2013F
Profitability (%)
EBITDA 14.6 13.6 16.5 21.4 24.2
EBITDA/Rev (%) 29.2 26.9 29.1 33.5 34.8
EBIT 13.9 12.9 15.7 20.5 23.2
EBIT/Rev (%) 27.8 25.3 27.6 32.1 33.4
NPAT 10.0 9.2 11.0 14.3 16.3
NPAT/Rev (%) 17.6 14.8 16.2 19.7 20.5
ROE (%) 32.2 19.6 18.6 20.9 19.4
ROA (%) 7.8 5.3 5.3 6.3 6.5
ROIC (%) 54.6 25.7 23.2 28.7 30.9
Financial Strength
Debt to equity (%) 36.8 34.1 42.7 37.3 32.2
Net debt ($M) (7.9) 1.3 (5.5) (15.1) (26.9)
Net debt to equity (%) (24.6) 2.8 (10.1) (22.7) (33.3)
Net Debt to EBITDA (%) (54.0) 9.2 (33.1) (70.5) (111.2)
Interest Cover EBIT (x) na na na na na
Current Ratio (x) 2.9 2.7 2.7 2.9 3.2
Quick Ratio (x) 2.9 2.7 2.7 2.9 3.2
Valuation
Operating cash flow 2.9 2.5 9.5 12.4 15.0
CFPS (¢ - FD) 2.3 1.9 6.9 9.0 10.8
Price/CF 16.3 18.9 5.5 4.2 3.5
BV per share ($) 0.2 0.3 0.4 0.5 0.6
Price/Book Value (x) 1.6 1.1 1.0 0.8 0.7
NTA ($) 29.8 43.7 52.8 65.4 79.6
NTA per share ($) 0.2 0.3 0.4 0.4 0.5
Price/NTA (x) 1.8 1.2 1.1 0.9 0.7
EV/Sales (x) 0.7 1.0 0.8 0.6 0.4
EV/EBITDA (x) 2.5 3.7 2.9 1.8 1.1
EV/EBIT (x) 2.6 4.0 3.0 1.8 1.1
Source: BBY, Company Reports

b
FSA GROUP LIMITED
INVESTMENT SUMMARY
Investment case
Attractive valuation
FY10 trailing PE of 6.2x and FY11F PE of 5.7x.
Discount to BBY base case DCF valuation of A$0.49/sh.
Free call option over growing non-prime home lending segment
Each A$100M
increase in
FSA’s loan
portfolio adds
A$0.055/sh of
shareholder
value
FSA’s current share price offers a free call option over growth in FSA’s non-prime home loan lending
business. This growth option is tangible and attractive given:
Track record. Since 2007, FSA has built A$200M loan portfolio with high asset quality.
Valuation upside. Each A$100M loan portfolio increment adds at least A$0.055/sh shareholder
value.
Funding outlook. As funding markets thaw, access to expansion capital increases.
Competitive advantage of FSA’s diversified debt solutions business model reduces average home
lending customer acquisition costs relative to pure non-prime home lenders which lack FSA’s
diversified business mix.
Diminished competition. FSA has an early mover advantage to capture upside in non-prime home
lending as the GFC resulted in failure of several pure non-prime home lenders.
Annuity revenue growth
Rising annuity income. Annuities were 54% of FY10 total revenues and we forecast they will
increase to 61% by FY13F.
Growing debt agreement market share
The addressable market is the market for Australian personal insolvencies which comprises the sum
of debt agreements, personal insolvency agreements and bankruptcies. The Australian personal
insolvencies market is mature, with 4% CAGR growth since 2000. Within this market,
debt agreements are a growing segment - the debt agreement share of total individual insolvencies
has increased from 3.3% (2000) to 23.1% (2010) of the total market (Chart 2 and Table 2).
FSA is the market leader with 51% FY10 market share, with the residual 49% market share divided
between 35 other operators, implying an average 1.4% market share each.
(Chart 6) The number of debt administrators has declined from 38 in September 2005 to 36
currently. FSA’s average market share over the last four years is 51%.
We expect FSA to continue its market share growth for debt agreements as legislative changes to
the debt agreement revenue model put smaller operators under financial pressure.
Diversified business/revenue model
The number of non-prime home lenders has reduced from 20 to 5 (including FSA),
as funding market dislocation rendered narrow business models unsustainable. Survivors typically
had diversified revenue models, diversified funding, retained earnings and/or access to capital.

b
FSA GROUP LIMITED
Sustainable competitive advantages
FSA’s diversified debt solutions business/revenue model is a key competitive advantage which has
allowed development of its non-prime home loan lending business and operating infrastructure in
anticipation of expansion as funding market conditions permit.
Its diversification results in lower customer acquisition costs for its non-prime home loan lending
business.
FSA’s corporatisation of the fragmented, cottage debt agreement segment has driven its leading
market share capture. Competitive advantages include equity capital market access and scalable IT
systems.
Pricing power
FSA retains pricing power in its non-prime home loan lending segment and to a lesser degree in its
SME factoring finance business.
Limited downside
In the event that Westpac Banking Corporation (WBC) does not renew its A$235M debt finance
facility for FSA’s home loan lending business, downside is limited by the value of FSA’s residual
sustainable businesses and the run-off value of FSA’s home loan portfolio.
KEY RISKS
Funding
Funding renewal and pricing risk. FSA’s home loan lending business is currently funded exclusively
by WBC. However, FSA’s scope for funding diversification is improving as funding markets (debt and
securitisation) normalise.
Asset-liability term duration mismatch. WBC’s funding is for 24 months whereas the average non-
prime mortgage term is three years.
Regulatory risk
Regulatory risk in the debt agreement segment is low. Recent changes to the Bankruptcy Act were
supportive of debt agreements.
Regulatory risk on the home loan lending segment relates to mortgage regulation, particularly on exit
fees. Given the political focus is on enhancing the competitive potential of smaller lenders (such as
FSA), we believe downside risks here are limited. There is increasing political awareness that exit
fees allow smaller lenders to stay competitive.
Bad debts
Limited recourse debt finance. Wholesale funding for FSA’s home loan lending and factoring finance
businesses are limited recourse to FSA.
High asset quality. FSA’s non-prime home loan portfolio has outperformed peers,
with arrears <5% (vs. 12% industry) and approx. A$80K capital losses since inception.

b
FSA GROUP LIMITED
BUSINESS OVERVIEW
FSA overview
Key drivers of
debt
agreements
business are an
increasing
addressable
market and an
increase in
market share.
Investors
receive a de
facto free call
option over
growth in FSA’s
non-prime
home loan
lending
business,
which is a
growing
segment with
minimal
competition
Each A$100M
in home loan
lending loan
portfolio
growth adds at
least
A$0.055/sh
shareholder
value
FSA operates three business segments – (i) Services; (ii) Home Loan Lending; and
(iii) Business Services and Lending. FSA offers investors a free call option over growth in its Home Loan
Lending segment. Table 1 summarises FSA’s business segments.
FSA started in 2000 and has been listed in ASX from 2002. Since listing, it has grown to 160 staff and
developed the operating platform and IT infrastructure for the provision of debt solutions. Today,
FSA is the largest provider of debt solutions to individuals in Australia. FSA acquires customers for its
business segments through direct advertising, which avoids third party referral costs and results in
customer “ownership”.
Services contributed 71% of FY10 group revenue (A$37.5M) and 65% of FY10 group NPAT (A$6.0M).
This segment provides consumer debt management solutions (such as debt agreements,
personal insolvency agreements and bankruptcy assistance) and home loan broking. The revenue
model is a combination of annuity income (a percentage of debt agreement repayment amounts and
broking trail fees) and upfront service fees (debt management services and broking upfront fees).
A debt agreement (“DA”) is a negotiated compromise between the debtor and creditor.
The agreement may include repayment of less than the full amount of debt owing or a moratorium
on repayment of debts. The key drivers of FSA’s debt agreement business are:
(i) an increase in the addressable market of consumers requiring debt solutions;
and (ii) an increase in market share as barriers to entry increase.
Home Loan Lending contributed 17% of FY10 group revenue (A$8.9M) and 28% of group NPAT
(A$2.6M). This segment provides non-prime home loans to consumers. FSA has organically
accumulated a A$200M non-prime loan portfolio (as at June 2010) which FSA intends to grow to
A$600M by 2013. We estimate that each additional A$100M increment in FSA’s loan portfolio translates
to A$0.555/sh value accretion.
This segment offers investors a free call option over growth. FSA has early mover advantage in this
segment, given the rapid decline of competition post the GFC and FSA’s positive operating momentum
in building a A$200M loan portfolio in the last three years. The key absent element to realising FSA’s
growth potential is securing additional funding. Risks include maintenance of asset quality during a high
growth phase and matching of asset-liability term duration. These risks are mitigated by FSA’s track
record and its ongoing efforts to extend liability term duration to match assets.
Business Services and Lending contributed 12% of FY10 group revenue (A$6.3M) and 7% of FY10
group NPAT (A$0.6M). This segment provides SMEs with debt solutions including factoring finance,
insolvency advice and consultancy services.

b
FSA GROUP LIMITED
TABLE 1: FSA BUSINESS SEGMENTS
Segment Services provided
FY10
revenue
(A$M)
% FY10
total
revenue
FY10
NPAT
(A$M)
% FY10
total
NPAT
Services Consumer debt management
solutions home loan broking 37.5 71% 6.0 65%
Home Loan Lending Home loans to non-prime
consumers 8.9 17% 2.6 28%
Business Services &
Lending
SME factoring finance
SME insolvency advice and
consulting service
6.3 12% 0.6M 7%
Source: BBY, FSA
SERVICES SEGMENT
Debt Agreements
A debt
agreement is a
legally binding
agreement
between a
debtor and
creditor to
define a
repayment
arrangement
schedule
A debt
agreement can
only be
accessed under
certain defined
circumstances
A debt
agreement
requires
majority
acceptance by
value of
creditors
Debt Agreements (DAs) were introduced under Part IX of the Bankruptcy Act in 1996 as a flexible
alternative to bankruptcy. A DA is a legally binding agreement between a debtor and their creditors. The
debtor can make a repayment proposal to creditors which if accepted by a majority of creditors becomes
binding on all creditors.
A DA can only be used by insolvent debtors (i.e. debtors unable to pay their debts as and when they fall
due). A DA can be proposed by a debtor who has:
Not been bankrupt or utilised a debt agreement or personal insolvency agreement in the last 10
years.
After tax income of less than $67,744 (indexed in March and September each year).
Unsecured debts of less than $90,326 (indexed in March and September each year).
Property that would be divisible among creditors if the debtor were bankrupt valued at less than
$90,326 (indexed in March and September each year).
An insolvent debtors’ best offer to their creditors is determined based on an analysis of their expected
income from all sources, household expenses and circumstances. The debtor must prepare an
achievable and sustainable offer to their creditors.
The DA proposal is sent to creditors to vote upon. A proposal is accepted if a majority of creditors in
value vote in favour of the debtor’s proposal. Some examples of the kinds of proposals offered are:
Periodic payments of amounts out of the debtor's income to creditors, equal to or less than the full
amount of all of the debtors provable debts.
Lump sum payment of less than the full amount of all of the debtor’s provable debts.
A moratorium on payment of debts.
Payment from the proceeds of sale of property owned by the debtor.

b
FSA GROUP LIMITED
Insolvency and Trustee Service Australia
ITSA is the
Federal
Government
body which
oversees debt
agreements
The Insolvency and Trustee Service Australia (ITSA), a Federal Government body,
ensures proposals are legally compliant and conducts the voting process with creditors.
ITSA maintains the National Personal Insolvency Index (NPII) to ensure it reflects the status of the
agreement.
Debtor profile
The most
common DA
debtor profile is
male, aged 35-
39, employed
and owes
approx. A$42k
The predominant profile of debtors who enter into a DA, personal insolvency agreement or bankruptcy
is:
Mostly male (58% of bankrupts; 53% of DA debtors).
The highest age bracket is 35-39 (15% of bankrupts; 22% of DA debtors).
Bankrupts are mostly unemployed (44%). In contrast, DA debtors are more likely to be employed
(92%) and so are personal insolvency agreement debtors (80%).
Home ownership is low among bankrupts (11%) and DA debtors (15%).
DA administrators have been increasing volume through more active engagement with homeowners.
From 2005 to 2007, the ratio of DA debtors who were homeowners increased from 8% to 15%.
Personal insolvency agreement debtors are generally wealthier than bankrupts and DA debtors –
with higher debts/assets/income and more home ownership and access to accounting advice.
The average DA debtor now owes approx. A$42,000 which is up from the A$15,000 average debt
amount in 2002. (Source: FSA)
Consequences of a debt agreement for the debtor
For debtors, the
primary
advantage of a
debt agreement
is avoidance of
bankruptcy
The primary
disadvantage is
the impact on a
debtor’s
personal credit
rating
There are pros and cons for the debtor of instituting a debt agreement.
Pros of a DA include:
Avoids bankruptcy.
Stay of further recovery action. During the voting period, unsecured creditors cannot take debt
recovery action or enforce a remedy against the debtor and must suspend deductions by garnishee
on debtor’s income. Once approved, unsecured creditors cannot take or continue action against the
debtor to collect their debts.
Unsecured creditor’s debts are fixed at the date the proposal was entered on the National Personal
Insolvency Index (NPII) and interest does not accrue.
All unsecured creditors are bound. All creditors with provable debts at the time the debtor’s details
are entered onto the NPII are bound by the agreement, even those who voted against it.
Debt release. The debtor is released from most unsecured debts when they complete all their
obligations and payments.
Cons include:
Credit rating. The debtor appears on the NPII, which may impact future access to credit.
An act of bankruptcy. Proposing a DA commits an act of bankruptcy. If the proposal is not accepted
by creditors, a creditor can use this to apply to court to make the debtor bankrupt.

b
FSA GROUP LIMITED
Consequences of a debt agreement for the creditor
The primary
advantage to
creditors is
higher recovery
The benefits to a creditor of a DA are:
Higher recovery rates. DAs provide an average return of 60c in the dollar (gross) vs. less than 2c for
bankruptcy (Source: Robert McLelland MP, second reading speech). Net of fees, creditors typically
receive 50c in the dollar.
Relative creditor ranking maintained. All unsecured creditors are bound by a DA and paid in
proportion to their debts. The relative ranking of creditors is not impacted by how creditors vote
for/against DAs.
Secured creditor rights are not impacted by a debt agreement.
Personal Insolvency Agreements
Personal
Insolvency
Agreements are
similar to Debt
Agreements
except they are
bespoke and
not means or
asset tested
Personal Insolvency Agreements (PIAs) were used prior to the introduction of DAs. A PIA is similar to a
DA, but is not means or asset tested and is bespoke. However, the high cost of bespoke PIA solutions
gave rise to DAs. The consequences of a PIA are similar to those for a DA to both the creditor and the
debtor.
As with a DA, a precondition of PIA application is that a debtor must be insolvent.
How does a Personal Insolvency Agreement work?
Personal
Insolvency
Agreements
require
acceptance by
the majority of
and 75% by
value of
creditors
The debtor appoints a controlling trustee to submit a proposal to creditors. Only a registered trustee,
ITSA or a suitably qualified solicitor can act as a controlling trustee. Acceptance requires a “special
resolution” comprising the approval of a majority of creditors by number and at least 75% by dollar value
who participate.
If the proposal is accepted, all creditors are bound. Secured creditors’ rights are not affected.
A trustee (who may be different from the controlling trustee but must be either a registered trustee or the
Official Trustee) is appointed as administrator.
If the proposal is rejected, creditors will either vote in favour of bankruptcy (the debtor does not have to
accept this), or leave the debtor to resolve their financial difficulties.
If the proposal is rejected or lapses, the debtor cannot appoint another controlling trustee for six months
without leave of the court.
Revenue model
Debt agreement
administrators
generate
revenue in two
ways: (i) set up;
and (ii)
administration
fees
DA administrators generate revenue in two ways: (i) set up; and (ii) administration fees.
Some administrators charge the set up fee whether or not the creditors vote for the proposed debt
agreement; other administrators only charge the set up fee if the creditors vote “yes” for the proposed
DA.
DA set-up fee proposals range from $500 to about $1,900, although they can be more than $1900
depending on the complexity and work involved. Set up fees usually incorporate the following services:
Budgeting assistance.
Providing information to debtors about their debt management options.

b
FSA GROUP LIMITED
Helping debtors access “hardship assistance” with banks and finance companies.
Stopping garnishees on wages and creditors continuing to ask for payment.
Preparing a debt agreement proposal and justifying to creditors why they should support the
proposal.
Lodging the debt agreement proposal with ITSA.
Debt agreement
administration
fees range from
18% to 30%
DA administrators will usually charge a fee for administering a debt agreement once accepted by
creditors. Fees currently charged range from 18% to 30%, although the majority charge is approx. 20%.
They collect the fee as a percentage of each payment made by the debtor.
If payments are not made by the debtor, the administration fee cannot be collected.
Expenses are recoverable only where the terms of the debt agreement provide for this and where
creditors have voted in favour of the agreement.
Change in revenue model – from upfront to parity cashflows
From 2007, the
debt
administrator’s
cashflow model
changed from
“upfront to
parity”
In 2007, legislative reforms prevented debt agreement administrators from charging insolvent
consumers an up-front fee; instead, administrators’ fees are taken proportionately over the life of the
agreement (“parity” cashflows). Parity fees average approx. $100 per month for five years.
The rationale for the change from upfront to parity fees was to encourage administrators to have a
financial interest in the ongoing success of a debt agreement.
Debt agreement market overview
Addressable market trends and outlook
The Australian
personal
insolvencies
market is
mature, with
4% CAGR
growth since
2000. Within
this market,
debt
agreements are
a growing
segment
The addressable market is the market for Australian personal insolvencies which comprises the sum of
DAs, PIAs and bankruptcies. The key trends are:
The Australian personal insolvency industry is mature, growing at 4% CAGR in the 10 years to 2010
(Charts 1 and 5).
Short-term, the market is driven by cyclicality of interest rates (Chart 1).
Whilst total personal insolvencies are increasing, the DA share of total personal insolvencies has
increased from 3.3% (2000) to 23.1% (2010) of the total market (Chart 2 and Table 2).
Increasing acceptances of DA proposals by creditors, with proposal rejection rates declining from
61% in 1997 to 23% currently. (Table 3)
Whilst the total amount of returns to creditors is increasing, the net return to creditors for each dollar
of debt outstanding is decreasing driven by unsecured debt levels increasing faster than income
(Chart 3 and Chart 4).

b
FSA GROUP LIMITED
CHART 1: AUSTRALIAN PERSONAL INSOLVENCY MARKET GROWTH RATES (% YOY GROWTH )
-10%
-5%
0%
5%
10%
15%
20%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Growthrate(%yoy)
Source: ITSA, BBY. NB: 2010 total (36,455) is flat vs 2009 (36,446).
TABLE 2: PERSONAL INSOLVENCY MARKET BY TYPE
Debt Solution 2000 total
number
2000 (% total) 2010 total
number
2010 (% total)
Bankruptcies 23373 95.1% 27509 75.5%
Debt Agreements 802 3.3% 8427 23.1%
PIAs 406 1.7% 519 1.4%
Total 24581 100% 36455 100%
Source: BBY, ITSA
CHART 2: SEGMENTATION OF THE AUSTRALIAN PERSONAL INSOLVENCY MARKET
DAs are
increasing as a
proportion of
the Australian
personal
insolvency
market
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Bankruptcies Debt Agreements Personal Insolvency Agreements
Source: FSA FY10 profit guidance (Sep 09), page 9

b
FSA GROUP LIMITED
TABLE 3: DEBT AGREEMENT VOLUMES AND ACCEPTANCE RATIOS
Financial Year
Ended
Debt agreement
proposals
received by ITSA
Debt agreements
made (accepted
by creditors)
Debt agreements
rejected
Increase in debt
agreements (vs
pcp)
1997 123 48 61%
1998 583 354 39% 629%
1999 811 507 37% 43%
2000 1157 801 31% 58%
2001 2239 1234 45% 54%
2002 5647 3294 42% 167%
2003 6476 4550 30% 38%
2004 7043 5487 22% 21%
2005 6941 4739 32% -14%
2006 7567 5047 33% 6%
2007 9207 6923 25% 37%
2008 9112 6540 28% -6%
2009 11353 8599 24% 31%
2010 10900 8384 23% -3%
Source: Consumer Credit Legal Service, ITSA
Debt Agreement Demand Drivers
DAs are driven
by total credit
card balances
and debt
serviceability
DA volumes are driven by (i) credit card balances; and (ii) debt serviceability ratios. Credit card
balances have combined with increased financial stress to result in higher DA volumes - the correlation
between these two variables is high, with a R-squared of 0.8623. (Charts 3-5)
BBY’s base case valuation forecasts 10% and 8% total debt agreement market growth in FY11F and
FY12F (driven by the interest rate cycle) followed by 4% perpetuity growth
(in line with the 10-year CAGR).
CHART 3: CREDIT CARD DEBT (A$BN) 2002 – 2009
$ 0
$ 10
$ 20
$ 30
$ 40
$ 50
Aug-2002
Feb-2003
Aug-2003
Feb-2004
Aug-2004
Feb-2005
Aug-2005
Feb-2006
Aug-2006
Feb-2007
Aug-2007
Feb-2008
Aug-2008
Feb-2009
Aug-2009
Feb-2010
Aug-2010
$bn Repayments Balances
Source: FSA

b
FSA GROUP LIMITED
CHART 4: DEBT TO DISPOSABLE INCOME
0%
35%
70%
105%
140%
175%
Mar-77
Mar-80
Mar-83
Mar-86
Mar-89
Mar-92
Mar-95
Mar-98
Mar-01
Mar-04
Mar-07
Mar-10
Source: RBA, FSA
CHART 5: REGRESSION OF DEBT AGREEMENTS VS DEBT/DISPOSABLE INCOME RATIO
R-squared of
0.8623
indicates a high
correlation
between debt
agreements
and
debt/disposable
income ratio.
Quarterly Debt Agreements= 2184.2 x Debt to diposable income - 1635
R2
= 0.8623
-500
0
500
1000
1500
2000
2500
60% 80% 100% 120% 140% 160% 180%
Debt to disposable income (%)
QuarterlyDebtAgreements
Source: BBY
Competition and Market Share
FSA is the debt
agreement
market leader,
with 51%
market share
FSA has a dominant and growing market share in the otherwise fragmented debt agreement
administration market.
The number of debt administrators has declined from 38 in September 2005 to 36 currently FSA is the
market leader with 51% FY10 market share, with the residual 49% market share divided between 36
other operators, implying an average 1.4% market share each (Chart 6). Administrators who operate
nationally include Australian Debt Counsellors (ADC); RDA Creditflix; Phillip Aggs and Co; and Credit
Counsellors Australian (CCA). It is not clear who the second largest operator is and the quantum of their
market share.

b
FSA GROUP LIMITED
CHART 6: FSA DEBT AGREEMENT MARKET SHARE
50%
49%
52%
47%
51%
54%
51%
42%
44%
46%
48%
50%
52%
54%
56%
FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010
Source: FSA, ITSA, BBY
Barriers to entry into the debt agreement market
Barriers to
initial entry are
low; barriers to
scale are
medium-high
Barriers to initial market entry are relatively low. However, barriers to scale are medium-high.
The barriers to scale and FSA’s corporatisation of debt agreement administration have driven
the large gap between FSA’s DA market share and its fragmented competition.
Barriers include:
Sufficient capital to support the initial years of debt agreement portfolio accumulation.
The legislated cashflow parity model prescribes that DA administrators can only extract cash flow
over the life of a DA (typically five years).
IT systems including inbound call centre management and budgeting systems.
Deal origination. FSA’s sector dominance results in a large presence across multiple marketing
channels, including TV, radio, newspapers, online and referrals.
Diversified debt solution offering for consumer and SME clients, which enables a business to convert
more lead generating into revenue.
FSA’s debt agreement track record
FSA has steadily increased its returns to creditors, with a CAGR of FSA’s creditor distributions of 32.6%
since 2004. However, consistent with the trend of rising debt per debtor and diminishing creditor
payback ratios (cents in the dollar), FSA’s debt agreement returns to creditors have declined from 90%
gross (net 70%) to 63% gross (net 50%). PIAs are a small proportion of FSA’s overall business; hence
we focus on DAs (Table 4).
TABLE 4: FSA’S PAYMENTS TO CREDITORS UNDER DEBT AGREEMENTS
Year Return to creditors (A$M) Growth (%)
2004 10.2
2005 15.2 49.0%
2006 18.8 23.7%
2007 22.5 19.7%
2008 29.4 30.7%
2009 41.9 42.5%
2010 55.5 32.5%
Source: FSA

b
FSA GROUP LIMITED
Regulatory framework and outlook
Regulatory Framework
Regulatory risk
is low
The Federal Bankruptcy Act 1966 is the governing legislation. In our view, regulatory risk for
professional debt agreement administrators such as FSA is low given: (i) recent legislative amendments
have intended to “make debt agreements more widely available”; (ii) general policy support, including
consistent bi-partisan political support for protecting consumer rights; and (iii) international trends are
supportive of DAs.
Increased accessibility of debt agreements
Legislative
change
supports debt
agreements
Recent amendments to the Bankruptcy Act 1966 (from August 2010) are expected to increase the
FY11F volume of debt agreements, in the following ways: (i) Giving debtors who lodge an intent to file
for bankruptcy more time (increased from 7 to 21 days) to consider their position, during which creditors
will be barred from taking any action; and (ii) Increasing the minimum debt for bankruptcy from A$2,000
to A$5,000.
General policy support
The A-G has
highlighted the
benefits of DAs
to creditors and
debtors
Attorney General McClelland’s second reading speech highlights political support for debt agreements
(Source: Hansard, 28 October 2010): “In recent years, debt agreements have become an increasingly
popular alternative to bankruptcy. Not only can they be good for debtors; they can also be good for
creditors. They provide far superior returns to creditors when compared with bankruptcy. Last year, debt
agreements provided an average return to creditors of around 60c in the dollar, compared with less than
2c in the dollar from bankruptcy”.
International trends in debt agreements
Consumer
education is
likely to be
introduced into
the Australian
legislation
There is increasing support for the DA concept. For example, after personal insolvencies increased by
45.5% from September 2008 to September 2009, Canada implemented the following reforms:
Increased the threshold from $75,000 to $250,000 for “Consumer Proposals”.
Unlike the Australian experience, a debtor who proposes a Consumer Proposal does not commit
“an act of bankruptcy”.
It is compulsory for the debtor to attend counselling as a condition of the issuance of a certificate of
full performance of his or her Consumer Proposal. Debtor education also exists in the USA,
suggesting this may eventually be introduced into Australian legislation.

b
FSA GROUP LIMITED
HOME LOAN LENDING SEGMENT
“Free” growth option
Home Loan
Lending
provides
investors with a
tangible free
growth option
FSA’s home loan lending segment provides investors with a tangible growth option, which is not
currently discounted in FSA’s share price.
Each additional
A$100M
increase in
FSA’s home
loan portfolio
adds at least
A$0.055/sh
value
Improving
funding
markets
enhance FSA’s
prospects of
securing
expansion
funding
FSA commenced its non-prime home loan lending business in June 2007 and has since grown its value
to A$200M with minimal arrears and near-prime loan portfolio performance.
FSA’s strategy is to grow its loan portfolio to A$600M by June 2013.
We believe this growth option is attractive given:
Valuation upside. Each A$100M increase in FSA’s home loan portfolio adds a minimum of
A$0.055/sh of FSA shareholder value.
Diminished competition. Non-prime home loan lenders have reduced from approximately 20 (pre-
GFC) to 5 currently. The key lender is Liberty Financial, followed by a range of smaller players
including FSA.
Good track record since 2007 with A$200M loan portfolio and very good asset quality.
Origination competitive advantage. FSA’s Services business assists with lead generation for the
non-prime home loan lending business.
Funding markets improving. Funding remains FSA’s key growth constraint. As funding markets
improve (i.e. securitisation, senior and mezzanine debt markets), FSA is uniquely well placed to
realise its upside.
Key risks
The key risks are (i) funding; (ii) asset-liability mismatch; (iii) asset quality; (iv) bad debt expense; and
(v) regulatory risk. We summarise key risks and mitigants in Table 5.

b
FSA GROUP LIMITED
TABLE 5: FSA’S PAYMENTS TO CREDITORS UNDER DEBT AGREEMENTS
Risk type Probability Impact Description Mitigants
Funding Low High - Risk of change to funding
terms, non-renewal or
withdrawal.
- Funding can be withdrawn if
there is an event of default.
- Non-renewal risk arises at
each annual review. The next
review is October 2012. If the
debt finance facility is
withdrawn, the maximum loss to
FSA would be the expected
revenue on the existing loan
portfolio and FSA’s equity
contribution therein.
- In the downside case of
funding non-renewal, the likely
result will be orderly book wind-
down over mortgage life. This
scenario’s valuation is
supported by the value of
FSA’s other businesses
segments and the run-off value
of the loan portfolio.
- Since 2007, WBC has
renewed funding lines 3 times
and increased the amount from
A$200M to A$235M.
- Strong portfolio track record is
indicative of underwriting
standards.
- Funding diversification
strategy.
- WBC’s funding is limited
recourse to FSA. The primary
recourse is to the loan portfolio.
FSA’s capital at risk is limited to
its equity contribution.
Asset-
liability
mismatch
Medium High The average asset duration is
approx. 2.5 to 3.5 years,
whereas the WBC debt finance
facility duration is two years.
FSA is continuing to lengthen
liability duration with the
intention of matching asset-
liability duration.
Asset
quality
Low High Rapid growth typically entails
asset quality maintenance risk.
- Funders require FSA to
maintain specific underwriting
standards.
Bad debt
expense
Low Medium An external macroeconomic
shock may drive higher bad
debt outcomes.
- FSA remains well provisioned
relative to major bank
regulatory expected loss rates
(Table 10)
- Mortgage book arrears
substantially below peers since
inception, indicative of tighter
lending standards.
- High asset quality (Table 7)
- Risk-based pricing.
Exit fee
regulation
Low Low Political focus on mortgage
“exit” fees. Loss or reduction in
deferred establishment (“exit”)
fees.
- Flexibility to re-price mortgage
rates to recover costs.
- Exit fees are arguably pro-
competition and supportive of
smaller lenders.
Source: BBY

b
FSA GROUP LIMITED
Non-prime home loan market
Unsatisfied
demand for
non-prime
home loans is
evident
The total value of Australian residential mortgages is approx. A$1 trillion, of which A$717bn is owner-
occupied finance and A$311bn is investment property finance. The total value of the Australian
mortgage portfolios of the four major banks and regional banks is A$953bn, most of which is prime
quality (Table 6).
In contrast, the non-prime home lending market is relatively small, with estimated total value of A$15bn
in 2007 (source: Datamonitor). Approx. 50% of this amount was securitised, with peak non-prime RMBS
total current loan balances outstanding of A$7.5bn in June 2007 (Chart 7). We believe the decline in the
total value of RMBS balances by 61% from their A$7.5bn peak to the current amount of A$2.7bn is
indicative of unsatisfied demand for non-prime home loans.
CHART 7 NON-PRIME TOTAL OUTSTANDING RMBS LOAN BALANCE
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Jan-00
Jul-00Jan-01
Jul-01Jan-02
Jul-02Jan-03
Jul-03Jan-04
Jul-04Jan-05
Jul-05Jan-06
Jul-06Jan-07
Jul-07Jan-08
Jul-08Jan-09
Jul-09Jan-10
Jul-10
Outstandingbalance(A$bn)
Source: S&P RMBS Performance Watch
TABLE 6: MORTGAGE PORTFOLIO VALUES
A$ billion ANZ CBA NAB WBC BOQ BEN SUN
Portfolio value 149.0 259.8 152.0 277.6 22.8 26.0 29.6
Source: Annual reports, BBY
Competition
One of FSA’s
competitive
advantages is
its diversified
revenues
Competition in the non-prime home loan mortgage market has materially declined post-GFC, driven by
the dislocation of securitisation and other wholesale funding markets. Business models reliant solely on
securitisation finance have become obsolete. GFC survivors relied on retained earnings or other
revenue streams for survival.
One of FSA’s competitive advantages is its diversified revenues. FSA’s Services business generates
organic cashflow to incubate its growth options until expansion capital is accessed.
Liberty
Financial and
Pepper
Homeloans are
the main non-
prime home
loan lenders
Exited players include Bluestone, GE Money, Challenge (Interstar) and Allco Finance (Mobius).
Currently, the remaining main players are Liberty Financial, Pepper Homelaons, Resimac,
La Trobe and Redzed. A summary of the two leading non-prime lenders follows:
Liberty Financial’s initial business focus was soley non-prime home loans but has since progressed into
motor finance and personal finance in Australia and New Zealand.
Liberty originates through its referral network of banks, non-banks, mortgage brokers, mortgage
originators and direct enquiries via the call centre or online. It is currently Australia’s largest non-prime
home loan lender and had written over 10,000 residential mortgages as at June 2006.

b
FSA GROUP LIMITED
Pepper Homeloans was established in 2001 and is a funder of non-prime home loans.
It survived the GFC by expanding its mortgage servicing business. It was acquired by Aladdin Capital,
a US-based private equity investor that specialises in credit-related businesses.
It continues to undertake a small amount of new lending with the support of its warehouse funders
(Barclays, CBA and NAB). It mortgage portfolio is believed to be approx. A$500M and loans under
administration approx. A$1.5bn. Brokers remain the main origination channel, but it is also investing in
call centres and online.
Revenue model
FSA is currently originating approx A$140M of new loans p.a., of which 37% is externally brokered and
63% receive loans from FSA’s Home Loan Lending segment.
Externally brokered loans generate an upfront commission (0.70%) and trail commission (0.25%).
Internal loans generate a combination of net interest margin (NIM), deferred establishment fee (DEF),
settlement fee and initial risk assessment fee. DEFs are brought to account straight-line over the
average three year life of a non-prime loan. DEFs are payable if the borrower refinances within a
specific time period, usually five years. For the remaining revenue items, revenue should approximately
equal cashflow.
Note that external broking fees are included in the “Services” segment (for reporting purposes).
Funding
WBC provides FSA with limited recourse funding for non-prime home loans. The debt finance facility
was first provided by WBC in May 2007 and has been increased once and rolled over three times since
then.
In May 2010, WBC renewed the facility until 15 July 2011 and increased it to A$235M comprising
A$225M senior debt and A$10M mezzanine funding debt at 2% and 9% over BBSW respectively.
In October 2010, WBC renewed the A$235M facility until 15 October 2012.
If there is an event of default or the facility is not renewed, then WBC’s recourse is to the loan portfolio
assets and is limited to FSA’s equity contribution into the loan pool.
Securitisation market trends
An upside risk
is
securitisation
market
recovery
RMBS volumes
are recovering,
but there has
not been any
non-prime
issuance since
December 2008
A range of
policy options
exist to
promote
securitisation
One upside risk for FSA is a recovery in securitisation funding markets driven by both market
normalisation and political efforts to improve home loan lending competition. Securitisation was
traditionally a key funding source for regional banks and third tier lenders. Post-GFC,
both availability and cost of securitisation funding have become challenging.
The cyclical peak level of RMBS issuance was A$60M in 2006; but has since dropped to A$16.4bn in
FY09 and approx. A$15bn in 2010. Issuance composition in 2010 has been:
(i) 66% prime, mortgage-backed securities; (ii) 9% low-docs; (iii) 8% other asset-backed securities; and
(iv) 7% commercial mortgage-backed securities. However, there has not been any non-prime issuance
since December 2008.
Structural concerns remain, with 13 out of 51 prime RMBS pools originated by non-banks (26% total)
being past their call date (as at July 2010). In contrast, pre-GFC almost all Australian RMBS were
redeemed on reaching the call dates, consistent with market expectations.
Possible policies to promote securitisation markets include: (i) a Federal guarantee of RMBS as in
Canada; (ii) bullet RMBS, where issuers cannot repay bonds early, which mitigates investor’s
reinvestment risk; (iii) guarantee of mortgage insurers; and (iv) expansion of the Australian Office of
Financial Management (AOFM)’s mandate to invest in both primary and secondary market RMBS.

b
FSA GROUP LIMITED
Spreads are
narrowing
There has been
a range of
recent issues
which are
analogous to
FSA’s non-
prime, full-doc
residential
mortgage
space
RMBS spreads have started to narrow, with short-dated AAA tranche spreads declining to 100bp (vs. a
cyclical peak of 400bp).
There has been a range of recent securitisation issues which indicate improving prospects for FSA to
securitise its non-prime, full-doc home loan mortgage portfolio. These include:
Resimac’s A$208M low-doc, prime issue (May 2010) with weighted average pricing across two
senior tranches of 167.5bp, which was the first domestic mortgage-backed securities issue for
almost two years.
Investec’s A$240M asset receivables issue (May 2010) comprising motor vehicle and equipment
leases with average loan value of $48,000, average seasoning of 11 months and the average
interest rate of 9%. The senior tranche was issued at 160bp margin.
Asset-backed bond issues remain pretty rare, with the previous issue from agricultural and
equipment financier CNH for A$350M in April 2010.
MyState Financial’s A$250M full-doc prime issue (July 2010) with weighted average pricing
(excluding the undisclosed B tranche) of 125bp.
Liberty Financial’s A$200M prime RMBS issue (August 2010) with margins on disclosed tranches
ranging from 100 to 165 bp. The AOFM bought A$90M of the Class A2 notes and $10.4 million of
the Class AB notes, comprising prime residential mortgages with average LVR of 70.2% and 28
month seasoning.
Bank of Queensland’s (BOQ) A$1.6bn full-doc prime issue (August 2010) with average LVR of
55.7% and 100 -110bp margin on the two senior tranches.
Asset quality
FSA has
maintained
high loan
portfolio asset
quality
FSA’s asset quality compares favourably with non-prime competitors, with 30 day plus arrears of less
than 5% compared to competitors’ 12% (Chart 8), low 67% portfolio average LVR and 98% “full doc”
loan portfolio (Table 7). We summarise FSA’s loan portfolio characteristics in Table 8 and Chart 8.
TABLE 7: FSA’S NON-PRIME HOME LOAN PORTFOLIO VS COMPETITORS’ PORTFOLIOS
FSA has lower
arrears, a lower
average
portfolio LVR
and
predominantly
“full doc” loans
FSA Competitors
30+ day arrears 5% 12%
“Full Doc” proportion 98% 35%
LVR weighted average 67% 74%
Source: FSA, S&P SPIN data
Provisioning
FSA’s FY10 loan portfolio provision is A$220,205, which is 0.11% of its FY10 non-securitised loan
portfolio of A$200M, and is based on specific provision analysis on loans with >60 days arrears and
FSA’s exposure relative to current valuations. The case supporting FSA’s level of loan portfolio
provisioning is:
Peak major bank mortgage loss rates (on prime mortgage portfolios) through the 1991-93 and 2008-
09 bad debt cycles was 0.05% of gross loans (Table 9). Given FSA’s portfolio performance has been
near-prime, arguably this loss rate is a relevant benchmark.
Total capital losses since inception are approximately A$80k, with strong performance through the
GFC.

b
FSA GROUP LIMITED
An argument for higher provisioning could be that FSA is under-provided relative to major bank
regulatory expected loss (REL) forecasts (Table 10), with CBA’s FY10 REL of 37bp.
However, the rebuttal is that REL measures a bank’s expected loss given default (LGD) in stressed
economic conditions rather than long run loss averages. Although major banks do not define “stressed”
conditions, we derive insights from CBA’s recent mortgage portfolio stress testing which assumed
mortgage rates increase to 14%, unemployment 10% and house prices fall by 30% - on this basis, CBA
estimated 20bp loss. Given we believe the likelihood of this macroeconomic scenario is remote, FSA’s
provisioning appears adequate on this basis.
CHART 8: FSA NON-PRIME HOME LOAN PORTFOLIO ARREARS VS COMPETITORS
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Jul-08
Sep-08
N
ov-08
Jan-09
M
ar-09
M
ay-09
Jul-09
Sep-09
N
ov-09
Jan-10
M
ar-10
M
ay-10
Jul-10
Competitors' Arrears Performance (Over 30 days) FSA's Arrears Performance (Over 30 days)
30dayplusarrears
Source: FSA, S&P
TABLE 8: FSA PORTFOLIO CHARACTERISTICS
FSA
30+ day arrears <5%
“Full Doc” borrowers: 98%
LVR - weighted average 67%
- maximum individual LVR of 80%
- maximum portfolio LVR < 75%
Geographical spread Geographically well diversified: Qld – 29.3%. Vic – 24.2%. NSW – 20.8%. WA –
14.7%. SA – 4.6%. Tas – 3.2%
Average loan size $200,000
Underwriting standards - Full doc preferred
- Debt consolidation preferred
- Debt Servicing Ratio of minimum 1.1x = (after-tax income) / (mortgage payments
+ living expenses)
- Interest rate stress minimum 2%
- No more than 35% non-metro postcodes
- All properties individually valued.
Borrowing purpose - Owner occupied preferred (94% of portfolio)
- 99% loans are for debt consolation purposes.
Source: FSA

b
FSA GROUP LIMITED
TABLE 9: MAJOR BANK LENDING LOSS RATES PER SEGMENT
ANZ CBA NAB WBC
1993 peak cycle loss rates per segment
Housing loss rate (% GLA) ND 0.05% 0.03% ND
Personal loss rate (% GLA) 0.96% 0.72% 1.51% ND
Corporate loss rate (% GLA) 3.41% 4.43% 2.09% ND
09-10 peak cycle loss rates per segment
Housing loss rate (% GLA) 0.05% 0.03% 0.04% 0.04%
Personal loss rate (% GLA) 1.15% 2.06% 1.98% 1.81%
Corporate loss rate (2) 0.38% 0.68% 0.30% 0.31%
Source: BBY, company accounts.
Notes. 1. “ND” = “not disclosed”. 2. “GLA” = ‘gross loans and advances”.
TABLE 10: MAJOR BANK REGULATORY EXPECTED LOSS AND WRITE-OFFS
ANZ FY10 CBA FY10 NAB FY10 WBC FY10
Residential mortgage portfolio (A$M) 209,643 364,193 221,395 351,229
REL (A$M) 469 1,362 740 669
Write-offs (annualised) A($M) 96 117 96 129
REL / mortgage portfolio value (bp) 22.4 37.4 33.4 19.0
Write-offs / mortgage portfolio value (bp) 4.6 3.2 4.3 3.7
Source: BBY

b
FSA GROUP LIMITED
BUSINESS SERVICES & LENDING SEGMENT
Factoring finance
The outlook for
factoring finance
lending growth is
positive given
difficulties in SMEs’
access to credit
This segment provides small medium enterprise (SME) customers with solutions including
factoring finance and insolvency advice/consulting services. Factoring finance commenced in
2008 and has grown to a A$11.6M loan portfolio (June 2010). We summarise the loan portfolio
characteristics in Table 11.
The segment has four revenue models:
Net interest income;
Administration fees;
Establishment fees; and
Consulting fees.
Funding
FSA commenced with a limited recourse WBC facility of A$10M which was later increased to
A$25M and renewed for a further term during the FY10 financial year. FSA’s objective is to
increase its loan portfolio to around A$20M to A$25M by FY11.
This facility is also limited recourse, with FSA’s exposure limited to 10% of the outstanding
facility balance up to a maximum of A$1M, unless there has been an event of default.
All receivables purchased by FSA are insured to 90c in the dollar.
Factoring loan pool
TABLE 11: FACTORING LOAN POOL
Metric FSA portfolio
Average loan size $172,000
LVR 55-65%
>90 days arrears 5.42%
Security Assigned receivables
Assigned receivables insured Yes
Source: BBY

b
FSA GROUP LIMITED
VALUATION AND EARNINGS ANALYSIS
High incremental ROE
FSA exhibits high
incremental ROE, a
characteristic of a high
quality business
Good businesses are able to reinvest organically generating earnings at high incremental
returns on equity (ROE). This is a feature of FSA.
Since 2005, FSA has increased its equity base by A$40M whilst NPAT has increased by A$8M,
which is 20% five year incremental ROE. (Table 12)
TABLE 12: INCREMENTAL RETURN ON EQUITY
A$M 2005 2006 2007 2008 2009 2010
NPAT 1.2 2.6 6.8 3.2 10.0 9.2
Total equity 4.7 11.9 18.9 22.6 32.1 44.7
Incremental equity invested 7.2 7.0 3.7 9.5 12.7
Incremental NPAT 1.4 4.2 -3.6 6.8 -0.8
RBA cash rate 5.50% 5.75% 6.25% 7.25% 3.00% 4.50%
Source: BBY, FSA
Valuation
Table 13 summarises EBIT contribution by segment.
Our base case A$0.49/sh DCF valuation is based on the following assumptions:
Discount rate of 13%. We have applied a discount rate of 13% which considers: (i) the
major bank discount rate of 11%; (ii) FSA’s small market capitalisation; (iii) growth potential
of its non-prime home loan lending business; and (iv) increasing annuity incomes.
Growth in total number of debt agreements. We estimate 7.5% growth in FY11F, 6.5% in
FY12F, then reducing to 4% growth from FY17F onwards (in line with the 10-year CAGR of
4% p.a by volume for the total personal insolvency market). We expect strong near-term
cyclical growth to be driven by the rising rate cycle. Charts 1 and 2 illustrate the growth of
Australian personal insolvency market and the rising share of debt agreements within this
market (from 3.3% in 2000 to 23.1% in 2010).
Growing debt agreement market share. We expect FSA to increase its market share to 54%
in FY13F and then 55% from FY14F as a slowing debt agreement market results in further
exit of smaller operators. If we assume FSA’s market share remains constant at 51.2%,
our DCF valuation becomes A$0.45/sh.
No growth in the non-prime home lending business. Our base case assumes FSA retains
its current A$200M loan portfolio but does not incorporate any growth in its portfolio.
We estimate each A$100M increase in FSA’s home loan portfolio adds a minimum of
A$0.055/sh.

b
FSA GROUP LIMITED
TABLE 13: FSA EBIT CONTRIBUTION BY SEGMENT
FY10A FY11F FY12F FY13F
Services 8.6 9.0 12.0 14.8
Home Loan Lending 3.4 3.6 4.6 4.6
Business Services & Lending 0.9 2.4 3.3 3.5
Total EBIT 12.9 15.7 20.5 23.2
Source: BBY, FSA
Earnings trends
Earnings are cyclical
but growing
FSA’s NPAT has grown at a 50% CAGR since 2005. FSA’s earnings are cyclical, but growing,
corresponding to the growth/cyclicality of the debt agreement market combined with FSA’s debt
agreement market share expansion and new product expansion such as home loan lending
and factoring finance.
Although we would normally expect earnings to be positively correlated with interest rates,
other offsetting drivers adversely impacted FY08 and FY10. FY08 was adversely impacted by
one-off costs to establish the home loan lending business (approx A$1.8M) and IT upgrade
costs to respond to changes in the debt agreement cashflow model. FY10 profits declined as
government stimulus payments and lower interest rates (relative to FY08) limited the numbers
of indebted consumers seeking assistance. We expect earnings upside in FY11F to be driven
by both the rate cycle and growth in FSA’s home loan lending and factoring finance segments.
Annuity revenues
Annuity income comprises 54% of total revenue in FY10, which we estimate will increase to
62% in FY13F. Annuity revenue streams are:
Debt agreement administration income. On average, FSA generates a 22% annuity income
from debt agreement administration.
Home Lending interest income.
Factoring finance interest income.
Individual insolvency consulting fees.
Earnings quality
We expect FSA to
return to high cash
conversion ratios in
future years, as
earnings “noise”
diminishes
FSA’s earnings showed high cash conversion ratios of 90.7% in FY05 and 84.6% in FY06
(Table 14). However, this conversion ratio has been obscured since 2007 by both the legislated
change from upfront to parity cashflow revenues for debt agreement administrators and FSA’s
business mix change from home loan broking to home loan lending. By 2012F, we expect
FSA’s cash conversion ratio to return to its previous ratios – we explain this below:
Cashflow impact of becoming a home loan lender
In FY08, FSA commenced its home loan lending business. FSA’s transition from a 100% home
loan broker to a broker and lender shifted its cashflow generation from an upfront revenue
model to a deferred revenue model. Broking revenue is booked in the month of settlement
(upfront commission) with a small residual trail commission. However, as a home loan lender,
cashflow is spread over the average life of the loan (30 months).

b
FSA GROUP LIMITED
TABLE 14: CASH CONVERSION RATIO
A$M 2005 2006 2007 2008 2009 2010
NPAT 1.2 2.6 6.8 3.2 10.0 9.2
Operating free cash flow 1.1 2.2 2.8 0.2 1.1 5.3
Cash conversion ratio 90.7% 84.6% 41.2% 7.3% 10.6% 57.3%
Source: BBY
Debt agreement cashflow revenue model – annuity income and service fees
From 2007, the DA
revenue model
changed from upfront
to parity over the life of
a DA to promote
sustainable DAs
In 2007, the Bankruptcy Act was amended to change debt administrators’ cashflow model from
the receipt of lump-sum upfront cashflows to receipt of a cashflows over the lifetime of a debt
agreement (up to five years). The policy rationale given was:
To “provide an incentive for administrators to develop sustainable proposals.”
(Source: Hansard, 1 March 2007, Kelvin Thomson MP’s second reading speech).
To introduce regulation to DAs given that they were “largely unregulated” since their
creation in 1996.
To encourage debt agreement administrators to put forward sustainable debt agreements
and to work with debtors if there is a change of circumstances.
This change had two cashflow impacts: (i) an accrual accounting vs. cashflow revenue
recognition difference for debt agreements which should not have an impact from FY12F
(Table 15); and (ii) Net cash payments required for institutional creditor distributions (cash
received by FSA from debtors for debt agreements agreed pre-2007). We discuss this below.
Net cash payments for institutional creditor distributions
FSA will continue to record cash outflows of “net cash payments for institutional creditor
distributions” over the next two years. This cash outflow does not undermine FSA’s earnings
quality because it relates monies received on behalf of and paid to creditors for debt
agreements under the pre-July 2007 legislation - whatever FSA receives it ultimately pays to
creditors. The last year this line item should appear is in FY12F as debt agreements under the
pre-July 2007 legislation will have been finalised by then. As at FY10, FSA has an accrual of
A$3.2M to be paid to creditors so the maximum the maximum “Cash Payments” will be A$3.2M
over this period.
Accrual vs. cashflow
TABLE 15: ACCRUAL VS CASHFLOW REVENUE RECOGNITION
Revenue item Accrual Cash impact
Debt agreement
administration fee
70% total estimated revenue booked in
Year 1 (with a 20% impairment provision),
followed by 7.5% revenue recognition each
period thereafter.
22% of the debtor’s gross
payment is FSA’s cash revenue
Home Loan Lending
- deferred
establishment fee
Revenue recognised straight line over 2.5
year loan life
Received lump-sum at the
refinance of a home loan
Source: FSA

b
FSA GROUP LIMITED
KEY MANAGEMENT
Management/Board holds 45.7% of FSA, with Mr Tim Maher (Chief Executive Officer) holding
35.3% equity and Ms Deborah Southon (Executive Director) holding 9.4%.
Mr Tim Maher, CEO - Mr Tim Odillo Maher co-founded FSA in 2000. Tim worked at ANZ Bank
in business lending and at Star Dean Wilcocks Chartered Accountants in corporate finance and
insolvency.
Mr Maher holds a Bachelor of Business and is a CPA. Mr Maher has broad insolvency work
experience including company reorganisations, turnaround and exit strategies.
Ms Deborah Southon, ED - Ms Deborah Southon co-founded FSA in 2000. Ms Southon has
worked in government and community services sectors, including the Commonwealth
Department of Health and Family Services, Department of Community Services, and the Smith
Family. Ms Southon has successfully managed a programme and administration budget
exceeding $150M.
Ms Southon has an Executive Certificate in Leadership & Management University of
Technology, Sydney and a Bachelor of Arts Degree (Sydney University). Ms Southon also has
qualifications in Speech and Drama (AMEB) and has undertaken post graduate management
studies at the Australian Graduate School of Management.
Mr Goran Turner, CEO of Home Loans Division - Mr Goran Turner is a career banker and
financier with over 40 years industry experience. Mr Turner has held senior credit and lending
posts with ANZ Bank, Citibank, Lloyds and NZI Bank.
Mr Turner joined FSA in March 2006 to establish its non-prime home loan lending division.

b
FSA GROUP LIMITED
This report has been prepared and issued (in Australia) by BBY Limited (ABN 80 006 707 777/AFS Licence No. 238095) (BBY) and is subject to the disclosures and restrictions set
out below.
Analyst Certification:
The research analyst(s) identified on the cover of this report individually certify that in respect of each security or issuer that the research analyst covers that: this report accurately
reflects his or her personal views about any and all of the subject issuer(s) or securities; and no part of the research analyst’s compensation was, is, or will be directly or indirectly
related to the specific recommendation(s) or views expressed by the research analyst(s) in this report.
Legal Entity Disclosures
Australia: BBY is Market Participant with the ASX and regulated by ASIC. U.K. BBY is authorised and regulated by the Financial Services Authority (FSA) Registration No. 146367.
U.A.E BBY (Dubai) Limited is authorised and regulated by the Dubai Financial Services Authority, Licence No. CL0705
General Disclosure
BBY and its associates (as defined in Chapter 1 of the Corporations Act 2001), officers, directors, employees and agents, from time to time, may own or have positions in securities
of the company(ies) covered in this report and may trade in the securities mentioned either as principal or agent or may be materially interested in such securities.
BBY does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could
affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Contact with FSA has been made during the preparation of this report for assistance with verification of facts.
Disclaimer & Warning
This report may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This
report does not purport to contain all the information that a prospective investor may require. Before making an investment or trading decision, the recipient must consider Market
developments subsequent to the date of this document, and whether the advice is appropriate in light of his or her financial circumstances or seek further advice on its
appropriateness or should form his/her own independent view given the person’s investment objectives, financial situation and particular needs regarding any securities or Financial
Products mentioned herein. Information in this document has been obtained from sources believed to be true but neither BBY nor its associates make any recommendation or
warranty concerning the Financial Products or the accuracy, or reliability or completeness of the information or the performance of the companies referred to in this document. Past
performance is not indicative of future performance. This document is not an offer, invitation, solicitation or recommendation with respect to the subscription for, purchase or sale of
any Financial Product, and neither this document or anything in it shall form the basis of any contract or commitment. Although every attempt has been made to verify the accuracy of
the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by BBY, its associates,
officers, directors, employees and agents. The securities of such company(ies) may not be eligible for sale in all jurisdictions or to all categories of investors.
Country specific disclosures
US Investors: This material is intended for use by “major U.S. institutional investors” (as defined in Rule 15(a)-6 of the U.S. Securities Exchange Act of 1934, (SEA 1934)).
Transactions by or on behalf of any “major U.S institutional investors” or “U.S institutional investors” (as defined in Rule 15(a)-6 of the SEA 1934 in any security mentioned in this
document may only be effected through CIMB Securities (USA) Inc., or Jefferies & Company, Inc. (“Jefferies”), U.S. registered broker dealers. The information upon which this
material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, its accuracy is not guaranteed. Additional and supporting
information is available upon request. This is not an offer or solicitation of an offer to buy or sell any security or to make any investment. Any opinion or estimate constitutes the
preparer's best judgement as of the date of preparation and is subject to change without notice. BBY or Jefferies, Jefferies International Limited or CIMB-GK Securities (USA) Inc,
and their associates or affiliates, and their respective officers, directors and employees may buy or sell securities mentioned herein as agent or principal for their own account.
United Kingdom: This report is issued and distributed by BBY (which is authorised and regulated by the Financial Services Authority (FSA) Registration No. 146367) only to
persons falling within Articles 19 (5), 38, 47 and 49, of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, (all such persons together being referred to as
“relevant persons”). Directors, officers and employees of such entities are also included provided their responsibilities regarding those entitles involve engaging in investment activity.
Persons who do not have professional experience relating to investments should not rely on this document.
U.A.E: This report is prepared or published by BBY (Dubai) Ltd (BBYDL) which is regulated by the Dubai Financial Services Authority (DFSA). This document is intended only for
Professional Clients and should not be relied upon or distributed to any other person. The writer of this document or a close relative may have a financial interest or material interest
in any investment to which this document relates. BBYDL or its associate may hold 1% or more of the total issued share capital of any issuer referred to in this document. BBYDL
or its associate may act as corporate broker for any issuer referred to herein. An issuer mentioned herein may have a material shareholding in BBYDL or its associate. BBYDL or its
associate may have undertaken corporate finance business with or for any issuer mentioned herein over the past 12 months, and/or may undertake such business in the future. An
associate of BBYDL may be a market maker in any investment referred to herein.
Canada: The investments or investment services referred to in this document are available in Canada only to “Designated Institutions”, as defined by the Securities Act (Ontario).
Analysts’ Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy
of the analyst(s) research, client evaluation feedback, independent survey rankings and overall firm revenues, which include revenues from, among other business units and
corporate finance.
Other International Investors: International investors outside the US, UK, UAE or Canada are encouraged to contact their local regulatory authorities to determine whether any
restrictions apply to their ability to purchase this investment.
Recipient Representations/Warranties: By accepting this report, the recipient represents and warrants that he or she is entitled to receive such report in accordance with the
restrictions set out in this document and agrees to be bound by the limitations contained herein. Any failure to comply with these limitations may constitute a violation of law.
Meanings of BBY Limited Ratings
Buy – Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.
Hold – Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus or minus 15% within a 12-month period.
Underperform – Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 15% or more within a 12-month period.
NR – The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or BBY Limited policies.
CS – Coverage Suspended. BBY Limited has suspended coverage of this company.
Speculative Buy – Describes stocks we research with a positive bias, whose company fundamentals and financials are being covered, but for which there is insufficient information
for BBY Limited to assign a Buy, Hold or Underperform rating.
Speculative Underperform – Describes stocks we research with a negative bias, whose company fundamentals and financials are being covered, but for which there is insufficient
information for BBY Limited to assign a Buy, Hold or Underperform rating.
Monitor – Describes stocks whose company fundamentals and financials are being monitored, or for which no financial projections or opinions on the investment merits of the
company are provided.
It is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
Free Float (float / current shares outstanding) *100 – This float figure is the number of shares that are available to the public and is calculated by subtracting the shares held by
insiders and those deemed to be stagnant shareholders. Stagnant holders include ESOP's, ESOT's, QUEST's, employee benefit trusts, founding shareholder equity stake plus senior
management equity stake, corporations not actively managing money, venture capital companies and shares held by Governments.
Valuation Methodology
BBY’s methodology for assigning ratings may include the following: market capitalisation, maturity, growth/value, volatility and expected total return over the next 12 months. The
price targets are based on several methodologies, which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF),
EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group
P/E, sum of parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months.
This Research has been prepared and issued by BBY Ltd and remains the property of BBY Ltd. No material contained in this Research may be reproduced or distributed, except as
allowed by the Copyright Act, without the prior written approval of BBY.
© Copyright BBY Limited

RESEARCH
BBY Limited ABN 80 006 707 777 – Participant of the Australian Securities Exchange and is authorised and regulated by the Financial Services Authority (FSA) in the UK
Melbourne Level 38, Rialto South Tower, 525 Collins Street, Melbourne, Victoria 3000 Telephone 613) 9226 0000 Facsimile 613) 9226 0222
Sydney Level 17, 60 Margaret Street, Sydney NSW 2000 Telephone 612) 9226 0000 Facsimile 612) 9226 0066
London 27 Knightsbridge, London, SW1X 7YB Telephone 44 (0) 207 201 2183 Facsimile 44 (0) 207 201 2181
Internet http://www.bby.com.au/
BBY CONTACTS
EXECUTIVES INSTITUTIONAL SALES & TRADING DESKS
Chief Executive Officer & Managing Director Head of Sales & Execution
Glenn Rosewall +612 9226 0032 gar@bby.com.au Rick Cole +612 9226 0162 ric@bby.com.au
Chief Financial Officer Australia
Arun Maharaj +612 9226 0044 anm@bby.com.au Paul Bryan +613 9226 0224 pab@bby.com.au
Peter Copeland +612 9226 0021 pmc@bby.com.au
Chris Eldridge +613 9226 0208 cwe@bby.com.au
RESEARCH DEPARTMENT Simon Hammer +612 9226 0030 sph@bby.com.au
Australian Real Estate & Investment Trusts Silis Key +612 9226 0082 sxk@bby.com.au
Dean Gomel +612 9226 0090 mmm@bby.com.au Gavin Long +612 9226 0161 gwl@bby.com.au
Consumer Discretionary Trent Mackie +612 9226 0150 tim@bby.com.au
Mark McDonnell +612 9226 0090 mmm@bby.com.au Grant Maze +613 9226 0239 gjm@bby.com.au
Rajiv Poddar, CFA +612 9226 0033 rxp@bby.com.au Bruce Moir +613 9226 0207 bgm@bby.com.au
Consumer Staples Jenny Mullineux +612 9226 0027 mjm@bby.com.au
John Welsh +612 9226 0067 jnw@bby.com.au Raffy Margarian +612 9226 0065 rcm@bby.com.au
Energy Ronald Ng +612 9226 0008 rkn@bby.com.au
Scott Ashton +612 9226 0051 sha@bby.com.au
Andrew Sullivan +612 9226 0100 ajs@bby.com.au
Gavin van der Wath +612 9226 0155 gvw@bby.com.au GLOBAL MARKETS
Financials Head of International Sales
George Gabriel, CFA +612 9226 0091 ggg@bby.com.au Stewart Palmer +612 9226 0166 sap@bby.com.au
Weibin Ge, CFA +612 9226 0076 wbg@bby.com.au
Health Care Asia
Dennis Hulme +612 9226 0083 djh@bby.com.au Jenny Mullineux +612 9226 0027 mjm@bby.com.au
John Welsh +612 9226 0067 jnw@bby.com.au UK/Europe
Industrials Jenny Mullineux +612 9226 0027 mjm@bby.com.au
John Welsh +612 9226 0067 jnw@bby.com.au Mike Shortland +44 207 201 2182 mas@bby.com.au
Information Technology USA
Mark McDonnell +612 9226 0090 mmm@bby.com.au Jeremy Dunlop +1 212 616 8607 jeremy.dunlop@cimb.com
Rajiv Poddar, CFA +612 9226 0033 rxp@bby.com.au Jenny Mullineux +612 9226 0027 mjm@bby.com.au
Materials, Metals & Mining Bruce Moir +613 9226 0207 bgm@bby.com.au
Mike Harrowell +612 9226 0043 mxh@bby.com.au Stephen Smith +612 9226 0046 sbs@bby.com.au
Swapan Pandya +612 9226 0073 sxp@bby.com.au
Andrew Sullivan +612 9226 0100 ajs@bby.com.au Derivatives
Gavin van der Wath +612 9226 0155 gvw@bby.com.au Huy Dinh +612 9226 0037 hxd@bby.com.au
Telecommunication Services
Mark McDonnell +612 9226 0090 mmm@bby.com.au Futures
Rajiv Poddar, CFA +612 9226 0033 rxp@bby.com.au Viviana Ochoa +612 9226 0114 vop@bby.com.au
Simon Parker +612 9226 0025 sjp@bby.com.au
Research Database Manager
Alma O’Reilly +612 9226 0092 aor@bby.com.au PRIVATE CLIENT BROKING & EXECUTION
David Bosci +613 9226 0235 drb@bby.com.au
EQUITY CAPITAL MARKETS/CORPORATE FINANCE Carsten Huebner +612 9226 0031 chh@bby.com.au
David Smith +612 9226 0112 des@bby.com.au Rob King +612 9226 0064 rgk@bby.com.au
Dan Chesson +612 9226 0079 djc@bby.com.au David Linden-Smith +612 9226 0074 dls@bby.com.au
Ram Gorlamandala +612 9226 0035 rng@bby.com.au Greg Chalom +612 9226 0117 gxc@bby.com.au
Jeremy Tobias +612 9226 0086 jet@bby.com.au
Anson Toh + 612 9226 0084 axt@bby.com.au ONLINE EXECUTION − SMARTRADER
Henry Fung +612 9226 0098 hxf@bby.com.au
OPERATIONS MANAGER
Wendy Lansdown +612 9226 045 wml@bby.com.au

FSA - equity research initiation report

Recommended

Recommended

More Related Content

What's hot

What's hot (18)

Similar to FSA - equity research initiation report

Similar to FSA - equity research initiation report (20)

More from George Gabriel

More from George Gabriel (20)

Recently uploaded

Recently uploaded (20)

FSA - equity research initiation report