AGM trading update: 15-20% growth on track
Credit Corp (CCP) provided a trading update for the first four months of FY17. Key operational metrics include:
- cash collected +11% on the previous corresponding period;
- payment arrangements +3.8% over the four months; and
- the gross lending book growing 6% to A$143m (vs A$135m at FY16-end).
CCP stated that its lending book is on track to achieve pro-forma returns in FY18 (~12% ROA; ~15% ROE), which is in-line with our expectations. US operations are still expected to break even in 2H17, with lower prices secured and productivity (collections per hour) increasing (+35%) on the pcp. Additionally, FY17 net lending volume guidance for A$35-45m remains on track, with volumes expected to increase in the seasonally strong December quarter.
FY17 guidance and PDL purchasing updated
CCP provided updated FY17 guidance for PDL purchasing of A$195-215m (vs A$180-200m previously), with A$190m contracted. Management stated that there is limited contested volume over the remainder of FY17. The increase in FY17 NPAT guidance to A$53-55 (vs A$52-54m previously) largely reflects the recent acquisition of NCML. Our forecast sits slightly (~2%) above the top-end of guidance, with net lending volumes being a small swing factor to earnings. Better than expected volumes would see higher upfront provisioning but a stronger FY18 outlook.
Setting up for continued double-digit growth into FY18
In our view, CCP already has an earnings base which gives relatively solid earnings visibility into FY18F. The Lending book is expected to hit pro-forma returns, which on our forecasts should drive +10% pa EPS growth for the group in FY18/19. Continued high PDL purchasing levels (both domestically and in the US) also secure a solid cash flow position into FY18. The US business remains a meaningful swing factor to medium- to long-term growth, and while sustained improvement in industry conditions is uncertain, recent signs are encouraging.
We make no changes to our forecasts and our blended PE/DCF valuation remains unchanged. In our view, CCP has strong growth potential (17% three-year EPS CAGR), supported by a proven management team, solid cash flow generation and balance sheet capacity. Key risks include pricing pressure (competition), changes in the compliance/regulatory framework and growth strategies not materialising as expected.
We maintain our Add recommendation.
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Disclaimer(s): Analyst owns shares.
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