Credit Corp: Consistency counts

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Analyst
Date posted:
29 January 2020, 4:53 PM
Sectors Covered:
Contractors/Developers, Consumer, Diversified Financials

  • CCP reported 1H20 NPAT growth of 15% and maintained FY20 NPAT guidance (15-18% growth). Excluding Baycorp, 1H20 organic growth was ~6.5%.
  • CCP's organic growth outlook remains solid, supported by strong incremental growth from the USA business to come through over FY21-23.
  • Acquisition opportunities (including the potential for PDL books) is the key upside risk and catalyst. Competitor 'stress' could lead to the opportunity.
  • We are positive on CCP with it having a strong, visible organic growth path, and further upside from likely capital deployment over 12-18 months. However, we retain a Hold based on valuation – looking for some additional upside to buy.

Result: NPAT up 15%, in-line with expectations

CCP reported 1H20 NPAT of A$38.6m, up 15% on the pcp and in-line with expectations (A39.4m forecast).

An interim dividend of 36cps (flat on pcp) was declared.

Earnings growth was driven by:

  1. The Baycorp acquisition (contributed A$2.9m of the incremental A$5m NPAT. The AU/NZ debt buying result was flat excluding Baycorp)
  2. 20% growth in Lending to A$9.6m
  3. a relatively small uplift in US debt buying NPAT to A$3.3m (from A$2.6m). PDL cash collections increased 17.7%, driven primarily by Baycorp (we estimate AU/NZ collections were down ~3% on the pcp) and the USA (+57%). CCP invested A$194m in PDLs (+60% on the pcp), which included A$75m from Baycorp; ~A$63m in AU/NZ; and ~A$56m in the US. The gross Lending book closed at A$230m, up 13% on the pcp. Net debt stands at A$206m with ~A$170m of debt headroom.

Key areas of interest

Areas of interest include:

  1. A$298m of PDL purchasing secured to-date (A$218m ex Baycorp versus A$230m purchased in FY19)
  2. USA cost to collect increased to 43% (from 39% in the pcp) due to the rapid headcount increase. CCP expect this to reduce to ~38% long-term
  3. USA headcount stands at 414 versus capacity of 700. US PDL purchasing at capacity is ~A$130m (versus FY20 expected US buying of A$95-100m)
  4. FY21 PDL purchasing should benefit from the return of a major forward flow (we estimate the potential for an additional ~A$30-40m purchasing for CCP)

Guidance reaffirmed

CCP reaffirmed all guidance metrics, including: EPS 149-151cps (+5-6%); NPAT A$81-83m (+15- 18% on the pcp); PDL acquisitions A$310-320m (tightened to the top-end); and net lending A$60-65m. Within guidance, CCP expects the USA to deliver NPAT of A$8-9m (1H20 A$3.3m) and Lending ~A$24m (1H20 A$9.6m).

CCP's divisional expectations and an annualised AU/NZ result equals a theoretical NPAT of A$84m (above guidance).

Potential for extra capital deployment is the key upside risk

Competitor stress in the domestic PDL business is still evident.

We factor in a solid uplift in AU/NZ PDL purchasing in FY21 (~A$200m from ~A$140m guided in FY20). However, there is the potential for asset sales (like the Baycorp book) which is the key upside risk.

Hold maintained on valuation: looking for a pull-back

We make immaterial changes to forecasts (<1%). We retain a Hold with CCP trading within range of our target (which includes a premium for capital deployment). Key risks are: upside from acquisitions; downside - consumer advocacy and regulatory risk within the lending division; and execution risk in the USA business ramp up.

More information

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Disclaimer: Analyst may own shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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