Why you should buy shares in Credit Corp Group
In the search for value, we are constantly scanning the market for out-of-favour businesses that we believe have been overlooked or over-punished by investors.
Taking a longer-term view enables Medallion to accumulate high-quality companies at significant discounts during periods of weakness, ahead of expected recoveries.
In our view, Credit Corp Group (ASX:CCP) exhibits these attributes.
What is Credit Corp Group?
Credit Corp was founded in 1985 and is the largest buyer of unsecured consumer debt in the Australian and New Zealand market, with a growing footprint in the large US market.
Essentially, the business primarily looks to purchase debt at a significant discount to the dollar, between 90 and 180 days in arrears, before ideally collecting that debt and profiting on the difference. The key skill is to price debt ledgers correctly and not overpay.
Obviously, the more management pays for a debt ledger, the more that is required to be collected to ensure a high level of return on invested capital.
That said, Credit Corp has a strong track record in the space and is known for being cautious with their purchasing. It exhibits high asset turnover and a low cost to collection ratio.
How has Credit Corp diversified?
CCP specialises in working with customers to provide responsible financial solutions as a pathway to financial stability.
It operates through three key businesses:
- Debt buying and collection: Purchases and collects outstanding debt from clients (banking, finance, telco, and utility providers) in ANZ and the US.
- Collection services: collects outstanding debt outsourced by clients in ANZ through three key businesses - NCML, Baycorp, and Collection house.
- Consumer lending: offers short-term responsible loan products for credit-impaired customers in ANZ, through Wallet Wizard (fast cash loans), and CarStart (car finance loans).
How does it compare to the competition?
While competition is present, being the largest debt collector in Australia with one of the most diversified service offerings, CCP is well-positioned to maintain its strength.
Their domestic competitors are mostly smaller debt collectors which lack the scale and access to capital.
In our view, these high barriers to entry caused by the need for scale, regulation, and access to capital, leaves Credit Corp well protected from domestic competition.
What is the CCP share price doing?
We believe the space remains somewhat overlooked by investors due to both the complexity of debt collection businesses and also the pain that has flowed through for the space during the rate hiking cycle seen in recent years.
Market conditions for Credit Corp were definitely weak in the 2023-2024 financial year, but these conditions are likely to improve in the medium term as interest rates normalise and ideally a "normal" level of credit delinquency returns.
With the share price down more than 50% from 2022 levels, we see this as an opportune time to consider accumulating.
Over the long term, we expect the field to continue to flourish, with distressed debt collection highly likely to remain necessary in economies that are fuelled by debt, especially now as consumers take on record amounts of mortgage debt, credit card debt, and continue to be impacted by cost-of-living pressures.
What about the Credit Corp management team?
The company's experienced management team have consistently proven themselves adept at navigating the company through economic cycles and adapting their decisions towards the current economic environment.
For example, the US debt purchasing business has been challenging and in response CCP has concentrated their efforts in purchasing "familiar assets with shorter cash payback periods".
In addition to CCP's debt collection business, Wallet Wizard is a market-leading credit product with fast and low-cost loans to consumers who can't access traditional credit products.
Wallet Wizard has a highly competitive credit offering with a lower all-inclusive cost vs most competition due to no upfront or ongoing fees. Further, it provides one-hour approval times which creates greater demand for the product due to convenience.
What is the company's outlook?
For the 2024 financial year, revenue was up 10% to $519 million, with net profit after tax (NPAT) down 11% to $81 million.
The key takeaway from these full-year results, however, was that 2025 financial year guidance provided by management indicated NPAT is expected to be in the range of $90-$100 million, representing 17% NPAT growth.
If this profit growth plays out and the debt-ledger purchasing environment improves as expected, the current price tag may prove to be an attractive buying opportunity.
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