The recession is a double-edge sword for this debt collection agency


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Credit Corp had a lousy year, but 2021 could be its best yet.

The debt collector has announced a strong annual result, excluding non-recurring items. Put another way, 'Besides that one iceberg, we had a good trip on the Titanic'.

Australia's largest debt collector did have a few good numbers to point to: revenue rose 22%, while net profit rose 13% to $79 million. However, these numbers exclude the impact of COVID-19. After impairments and loss provisions, revenue fell 3% and net profit was down 82% to $15.5 million.

debt collector credit corp

Key points

  • Unemployment has impaired collections
  • Pricing will improve with volumes
  • Recession is a long-term opportunity

Credit Corp's core business of purchasing ledgers of distressed debt from banks and utilities performed poorly, with the company writing off $69 million from the value of its loan book, roughly 13.5%.

The decline in carrying value reflects management's expectation for an 18% reduction in collections over the next two years - the main culprit being a drop in the number of borrowers willing to go on long-term payment plans, which fell from 81% to 73% as a proportion of all collections.

Thankfully, recoveries have improved since the worst of the crisis in March and April. May and June actually recorded unusually high levels of recoveries: the company collected nearly $300 per employee hour in those months, relative to the 2019 average of $249.

A great recession

Rising unemployment - now at a 20-year high of 10% - is a double-edged sword for Credit Corp: as it rises, it stymies collections, but it is also a key source of growth. Financial hardship increases the supply of debt ledgers, leading to favourable pricing and more opportunities.

Management said some US clients expect ledger volumes to almost double over the next year. We also note that Australia's big banks have increased their bad debt provisions by 25%, from 0.98% to 1.22% of their loan books. These both suggest a flood of ledger sales in the coming months, so there should be plenty of room to grow.

Year to June 2020 2019 /(-)

Revenue ($m)
313 324 (3)

Underlying NPAT ($m)
79.6 70.3 13
Impairments and provisions after tax ($m) 64.1 n/a n/a
NPAT ($m) 15.5 70.3 (82)
EPS (c) 25.5 141.9 (82)

Management expects the company to purchase $120 million-180 million worth of new debt ledgers in the 2021 financial year. This was probably the biggest disappointment of the result as that level would be slightly below purchasing in 2020 and 2019. When it's raining gold, you should be grabbing the wheelbarrow, not the Tupperware.

However, chief executive Thomas Beregi has a history of under-promising when it comes to official guidance, and that could be the case here. Management also said that 'the pipeline is likely to increase significantly' during the first half of 2021.

Debt collection is a bit like insurance - it's easy to grow revenue in the short term by lowering standards, but long-term success depends on a willingness to forgo business rather than chase diminishing returns. Beregi might be strategically under-promising purchases to avoid driving up ledger prices - if you're buying a house at auction, telling everyone how eager you are isn't a great idea.

What's more, depending on the ledger pricing achieved, it could be that while the company is outlaying roughly the same amount of cash this year as last, it is getting a much higher face value on the loans. If ledger prices halve, for example, every dollar Credit Corp hands to a bank buys twice as many unpaid debts that it can then try to collect.


The real test will be whether an increasing supply of ledgers and lower acquisition costs offset the greater number of defaulting loans.

It's reasonable to expect collections to dive again once Government support is removed. It's too early to judge the scale of the damage - and opportunity - the pandemic will cause as it washes through the economy, which is why we have a 'Very High' risk rating on the stock. There could be further write-offs on the current loan book, even while new ledgers are being picked up at bargain rates.

The company has $400 million of cash and credit lines to draw on and is expected to produce around $175m of free cash flow in 2021, so there's more than enough room to push on the accelerator if ledger pricing is favourable. Credit Corp is the lowest cost operator - with $3 collected for every $1 of collection expenses - so it can buy ledgers that weaker competitors are forced to reject and still remain profitable.

Management provided profit guidance of $60m-75m for 2021, with dividends in the 45-55 cents range. Credit Corp's stock is up 18% since we upgraded it to Speculative Buy two months ago, putting it on a forward price-earnings ratio of around 18 and a dividend yield of 2.7%. With able management, economies of scale and good long-term growth prospects, we're happy to HOLD.

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Graham Witcomb is a senior analyst at Intelligent Investor owned by InvestSMART Group. Graham has a degree in psychology from the University of Sydney and is a Chartered Financial Analyst charterholder. He previously worked for one of the world's most successful professional gamblers, and joined InvestSMART in 2013 where he focuses on healthcare, insurance and transport infrastructure. This article contains general investment advice only (under AFSL 226435). To unlock Intelligent Investor stock research and buy recommendations, take out a 15-day free membership.

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