1H18 result: 18.2% NPAT growth
Credit Corp (CCP) reported 1H18 NPAT of A$29.8m, up 18.2% on the previous corresponding period (pcp) and broadly in-line with expectations (A$30.9m forecast). An interim dividend of 31 cents per share (up 15% on pcp) was declared.
1H18 growth was driven by:
- a 7.1% increase in PDL and agency cash collections (approximately 4% increase in the core AUS division);
- 26.3% increase in interest income (Consumer Lending); offset slightly by EBITDA margin decline of approx. 80bp (to 57.7%).
Both divisions recorded solid EBITDA growth: Debt Buying +11.6% to A$40m, and Lending +64% to A$8.3m. Within Debt Buying, the domestic business delivered 7.8% growth (to A$39.2m) and the USA operations (now segmented) recorded EBITDA of A$0.8m (from a A$0.5m loss in the pcp).
FY18 guidance largely unchanged
CCP confirmed its FY18 earnings guidance of A$62-64m NPAT (+12-16% on the pcp). PDL purchasing guidance was upgraded to A$190-200m (from A$170-190m), with A$190m already contracted. CCP stated two PDL tenders will take place in 2H18 (in which CCP has low market share), and therefore some potential upside exists to FY18 purchasing expectations if CCP is successful.
Medium-term: the USA opportunity trumps domestic pressure
CCP highlighted AUS purchasing is expected to remain challenging due to competition. On our estimates, CCP would incur approximately 10% earnings pressure at the group level (over two to three years) if the current lower domestic market share persists. Under this scenario, we expect CCP to continue to deliver growth over FY19/20, however at a marginally lower rate.
Over the next three to five years, both the USA and Lending divisions have the potential to deliver material earnings growth as follows:
- we estimate the US division can deliver +A15m NPAT in three years (approximately 22% to group earnings) and +A$40m longer term;
- the current lending product has the potential to deliver approximately $8m additional earnings based on the projected maturity of the book (approximately 12% to group earnings); and
- further lending products are being refined (i.e. car loans) which presents a material opportunity if executed.
In addition, CCP has the potential to scale up its contingent collections division via acquisition; and acquire one-off loan or PDL books.
We have upgraded our share price target after minor forecast changes. Trading on 14.5x FY19 PE, Credit Corp's visible three to five year growth path is attractive in our view.
We upgrade our recommendation to Add.
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Disclaimer(s): Analyst owns shares.
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