Credit Corp: Consistency counts
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- 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:
- The Baycorp acquisition (contributed A$2.9m of the incremental A$5m NPAT. The AU/NZ debt buying result was flat excluding Baycorp)
- 20% growth in Lending to A$9.6m
- 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:
- A$298m of PDL purchasing secured to-date (A$218m ex Baycorp versus A$230m purchased in FY19)
- 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
- 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)
- 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)
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.
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