Morses Club Shares Down 63% As It’s Eaten By Lawyers – Can It Recover?

Trade Morses Club Shares Your Capital Is At Risk
Tim Worstall
Updated: 21 Feb 2022

Key points:

Morses Club (LON: MCL) shares have fallen 63% this morning on a trading update and director changes. The basic underlying problem is that doorstep lending just isn’t a good place to be right now. The legal environment has changed in recent years and some might even say that the deliberate intent was to harm companies like Morses.

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The situation has got to where there is significant doubt whether the entire sector still remains viable or not. This is not specific to just Morses Club that is.

Morses Club is a doorstep lender. High interest rates on small loans. In principle, there’s nothing wrong with the economic model. Yes, high interest rates and also, often enough, high default rates, the two making up for each other. The cost structure is expensive because having people going around doorsteps is expensive. The rate of return on capital for such companies is not out of line with other activities. But those high interest rates do draw the ire of the woke and socially committed. Which is a problem.

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For there has been a definite campaign to limit the interest rates that can be charged. This is what killed Wonga. If you’ve got a high cost structure then you must charge a high interest rate. It doesn’t help that APR is a very bad way of measuring the interest costs of short-term and low value loans. But once the socially just get the bit between their teeth they will just plough on. As they have been doing. When economists say that if you ban those high interest rates then there just will be no short-term and low value loans then that’s taken as a good thing, not the denial of credit to those who want it.

What interests us though as traders is what happens as a result, not the morals of the situation. What has happened is that the rules around such loans were changed. This set of the claims lawyers looking for companies to sue. This is, roughly enough, what is causing Amigo Holdings such problems. It’s not the business itself, it’s the legal claims upon it. Note the “roughly” and “not so much” there.

Which is what appears to be happening at Morses Club. They’ve made two announcements today. One is a trading update which says that profits will be down 20 to 30% from current consensus. Well, yes, but there’s also this ominous phrase: “The cost base of the HCC division has been impacted in recent days by a rapid increase in claim volumes submitted via claims management companies.” They’re starting to be eaten by the lawyers – as happened at Wonga and Amigo.

They’ve also tossed the CEO over the side but then that’s to be expected. That CEO also sold out of his stock and did so before this trading update and share price change at Morses. That might raise an eyebrow or two as well.

But the real problem here is uncertainty. OK, so it’s “in recent days” that the claims lawyers have been really gunning for them. So this is early doors and we don’t know how far it’s going to go. Nor does the company either, which isn’t a good look.

We’ve actually seen those claims lawyers eat entire companies before now. Whether they will Morses Club or not is unknown at present. Which is why the shares are down that 63%.

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