Credit Corp shares looking strong after reporting season

Credit Corp is the largest buyer of unsecured consumer debt in the Australian and New Zealand market, capturing 25% of the market. The business essentially looks to purchase at a significant discount in the dollar, debt between 90 and 180 days in arrears, before looking to collect that debt and profiting on the difference.

The key skill is to price debt ledgers correctly and not overpay on ledgers purchased.

Management has shown themselves to be very adept at purchasing wisely and growing the debt ledgers over an extended period of time. The business exerts high asset turnover and a low cost to collection ratio among its competitors that has allowed the company to increase earnings and dividends each year for the 10 years proceeding COVID, while Return on Equity has been trending higher over that period as well.

We are also supportive of a strong board that has worked closely with management to re-store value for shareholders after the initial COVID-19 falls which saw the business fall to as low as. While current chairman and holder of around $20 million in CCP shares, Donald McLay has announced stepping down as chairman, it has been confirmed that he will remain on the board as a non-executive director

Recent acquisition perfectly timed

The recent acquisition of a large portion of the purchased debt ledger assets and arrangement book of Collection House is very positive for CCP in our view.

CCP is clearly in a position of unrivaled scale in the Australian market along with what is consistently the most efficient balance sheet.

Half-year results exceed expectations

The company was one of the first cabs off the rank to deliver its half-year results in February with the company upgrading all key metrics and management stating they expect lending revenue and profit to return to growth in the second half after a year hindered by COVID.

First-half profit (NPAT) of $42.3 million, approximately 5% ahead of forecast helped by a lower-than-expected amortisation charge. Consumer lending stabilised in the December quarter with activity in December back to 86% of the previous corresponding period.

While revenues fell by 2% to $188 million against the prior corresponding half, the key for a business like Credit Corp is their profitability as it indicates how well they're selecting and how efficiently they're recovering the debt they purchase. In this instance, Net Profit After Tax grew at a strong 10% to a figure of $42.3 million against the prior corresponding half.

For a business like CCP we give profit a far higher weighting of importance than revenues as they could significantly increase revenues relatively easily, but if they can't efficiently collect that debt then there is no point growing those revenues.

We would much prefer they continue with their measured approach and deliver strong profits rather than buying debt ledgers for the sake of buying without careful investigation.

Australia and New Zealand debt buying delivered the largest proportion of profits in this most recent report but we are greatly encouraged by more than 100% profit growth against the prior corresponding half from their US debt buying which is very much seen as the growth engine for the business looking ahead.

Despite record investment for the half with the purchase of the Collection House Debt Ledger, management has confirmed the business is sitting on $400 million in cash and undrawn credit lines, bringing the ability to take advantage of further opportunities as they arise.

While COVID is expected to suppress purchasing in FY21 due to lack of supply, we see the US as providing the largest opportunities into the future so the early traction in the space provides confidence.

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