Why now could be the time to buy Credit Corp shares
Credit Corp 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 looks to purchase debt at a significant discount in 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 on ledgers purchased which is becoming more difficult due to new competition in the Australian market, 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.
The business exerts high asset turnover and a low cost to collection ratio that has, apart from last year due to COVID, enabled the consistent long-term increase in earnings and dividends.
Strong track record
Management has shown themselves to be very adept at purchasing wisely, building solid debt ledgers over an extended period of time.
We are optimistic that this careful approach which served them well through the GFC, can drive growth into the future and we are 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 share price fall to around the $6.25 level.
Half-year revenues decline but net profits exceed expectations
While revenues fell by 2% to $188 million, 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 (NPAT) grew at a strong 10% to a figure of $42.3 million against the prior corresponding half.
US debt delivers strong profit growth
A/NZ debt buying delivered the largest proportion of profits in their 1H 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 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 is very encouraging.
Business update confirms stability
In April, management updated the market with an increase in net lending, moving from $5-$10 million to $10-$20 million. On top of this, EPS, NPAT and ledger investment were all maintained.
With no alarming issues raised in the business update, a growing US presence and strong management, we see now as an opportune time to consider CCP while sitting at approximate 22% off February highs.