Investment Matters

A new COG in the machine

Clients currently hold shares in CML Group, an invoice financing company which provides invoice factoring and discounting, as well as equipment financing to SMEs (small to medium sized businesses).

The transaction between COG and CGR, which was announced on the 13th of November, will create a significantly larger, integrated financial services group.

COG is Australia’s largest equipment financing broker and aggregator. The group is both an originator (lending using its balance sheet) and aggregator of SME finance products, primarily equipment financing.

Its revenue is primarily derived from commissions on the sale of these products as well as the interest income it derives from the loans it originates. The company has been moving towards acquiring brokers (within its network), as well as originating more of the loans facilitated through its network (meaning, funding these loans from its own balance sheet rather than simply being a distributor).

 This should allow it to realise a greater portion of the value of these loans, improving its margins. Several other aggregators have successfully made a similar transition in the past, such as insurance aggregator Steadfast (ASX:SDF) and mortgage broking group Australian Finance Group (ASX: AFG).

 

An integrated SME financier

The merger of COG and CML sees the creation of synergies on several fronts.

The first is the opportunity for revenue synergies. COG’s extensive broker network provides a platform from which CML’s invoice financing products can be distributed, broadening its customer base. By the same token, COG’s distribution network also allows CML to accelerate its drive into the equipment financing market, which it has made significant inroads into (particularly with its recent acquisition of Classic Finance Group). The merger therefore creates strong cross-selling opportunities.

The combination will also see complementarity with respect to the experience of management, bringing together COG’s expertise in distribution and equipment financing with CML Group’s extensive history in invoice and trade financing. This serves to ensure the combined entity achieves not only growth of its loan book, but growth that is profitable and sustainable.    

The company also has the opportunity to realise meaningful operating cost synergies. The combined entity will benefit from shared services, and a reduction in compliance and listing costs, which should see a reduction in corporate overheads.

Furthermore, the combination of COG and CML will represent a larger, more liquid company, allowing greater facilitation of price discovery as the company becomes more investable. This will assist with realising the value we see in both businesses.

  WM29.11.19

Source: CML Group

The transaction

Under the scheme of implementation, shareholders of CML will be offered either: 5.4 COG shares for each 1 CML Group share held or 2.7 COG shares plus a cash consideration of A$0.24 for each 1 CML Group share held.

We have elected to take up clients’ entitlements to rights associated with the capital raising that is being conducted as part of the transaction. The rights issue was conducted at a price of A$0.48, which is in line with the company’s current trading price.

We see that in taking up their rights, clients will be able to maintain a greater proportion of ownership of the combined entity. As such, clients will derive greater benefit from the realisation of value embedded in COG, CML and the synergies between the two entities.

 

Important dates

Shareholders will meet on the 29th of January in the new year to vote with respect to the merger.

If the scheme is approved by shareholders (requiring a 75% majority), it is anticipated it will become effective on the 4th of February and implemented in the 18th of February 2020.