Credit Corp: USA scale potential about to shine through

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
04 August 2021, 8:00 AM
Sectors Covered:
Diversified Financials, Professional Services

  • Credit Corp Group (ASX:CCP) delivered FY21 NPAT of A$88.1m, +10.7% on the underlying pcp and in-line with expectations. The USA division drove growth, up ~120% (to A$17.7m NPAT). 
  • FY22 NPAT guidance is A$85-95m (MorgansE A$95.8m), with the bottom-end reflecting a (typically) conservative position early in the year. 
  • AUS/NZ PDL supply remains subdued, however CCP’s USA outlook is building with a strong contracted purchasing position.   
  • The balance sheet position (+A$60m net cash) provides upside optionality. 
  • Add maintained. Short-term risks exist from extended COVID lockdowns; however we believe the growth trajectory can build into FY23/24 and the longer-term earnings capacity of the group is significantly higher based on the USA potential.

Event: Solid FY21 delivered

Credit Corp Group (ASX:CCP) reported FY21 NPAT of A$88.1m, up 10.7% on the underlying pcp. 2H21 NPAT was up +8.5% on 1H21, benefitting from the CLH book acquisition.

Divisional underlying NPAT composition: AUS Debt collection +11% to A$54.1m; USA Debt collection +118.5% to A$17.7m; Lending -29% to A$16.3m.

2H21 EBITDA hoh trends included: AUS PDL down 3.6%; USA PDL +24%; and Lending +43.3%.

FY21 PDL purchasing of A$293m fell short of expectations (A$310m) on the back of subdued domestic supply. The Lending gross book closed at A$184m (+1.7% on pcp and +9.5% hoh).

CCP closed with A$61.7m net cash (up from A$16.2m in 1H21). 

Analysis: AUS difficult, however growth from USA and Lending

FY22 guidance includes: NPAT A$85-95m (-3.5% to +8% on pcp); PDL acquisitions A$200-240m (implied USA ~A$140m); and net lending A$45-55m.  

The PDL contracted pipeline stands at A$150m (vs A$86m in the pcp and A$51m in FY19). A$110m is contracted in the USA, a very strong starting position for FY22. CCP stated that USA targeted buying is A$200m by FY23; however, there is potential to be within range of this in FY22 (upside to purchasing guidance).

AUS PDL supply remains subdued, however improving from the low point. On balance, we  think  there  is  upside  risk  to  FY22  purchasing,  with  logical  prospects  of reasonably large inventory sales in AUS and CCP accelerating purchasing in USA.  

Lending: volumes in 4Q21 accelerated to 108% of pre-COVID-19 levels. Short-term volumes will be impacted by current Australian COVID-19 lockdowns, however net lending guidance implies book growth back to ~A$210m. CCP stated that a return to the previous book level of A$230m is possible by 1H23.  

ROE has been diluted to 14% in FY21, down from ~21% in FY19, with deployment of capital required to restore improved levels. CCP has available capital  of ~A$372m (~A$60m net cash) which provides the flexibility. We note to hit the full LTI hurdle in FY23, an NPAT of ~A$109m is required. 

Forecast and valuation update: minor changes

Minor changes to forecasts. Our PE/DCF valuation moves to (login to view).  

Key FY22 assumptions include: PDL purchases A$240m (AUS A$100m; USA A$140m); Gross Lending book to A$212m. 

Investment view: Add maintained

Add maintained. We view CCP as having a visible medium-term growth profile: we expect AUS PDL supply to improve over FY22/23 (with the potential for larger transactions  to  assist); we expect CCP to capitalise on the market share opportunity in the USA; and a rebound in consumer lending. 

CCP’s balance sheet position provides upside risk to near-term (FY22/23) earnings expectations. 

Price catalysts

Capital deployment via large inventory purchase; USA PDL’s or acquisitions. 

Risks

Extended COVID-19-related lockdowns, causing debt sale/collection moratoriums. Structural industry change impacting supply; reputational risks; regulatory risks. 

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