Credit Corp: Opportunities likely to present through the year
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Date posted:
- 21 July 2021, 10:00 AM
- Sectors Covered:
- Contractors/Developers, Diversified Financials
- We expect Credit Corp (ASX:CCP) to report FY21 NPAT at the top-end of guidance (A$85-90m).
- PDL supply remains subdued in both AUS and USA. We expect improvement through FY22, assisting the growth trajectory into FY23.
- We note our FY22 earnings expectations are the lowest across analyst estimates. On this basis, we see CCP’s FY22 guidance has the potential to disappoint.
- CCP’s balance sheet strength (+A$50m net cash) provides strong optionality.
- We upgrade to an Add recommendation. Whilst potential short-term weakness (guidance lower vs consensus; heightened COVID-19 restriction impacts) may provide a better entry point, our upgrade is based on a longer-term fundamental view.
Event: FY21 result 3rd August
FY21 result expectations: we expect Credit Corp (ASX:CCP) to report a solid result vs guidance metrics: NPAT A$85-90m (est. A$89.6m); net lending A$10-20m (est. A$23.4m); and PDL purchasing A$310-330m (est. A$310m).
FY22 guidance may underwhelm: we forecast FY22 NPAT of A$95.8m (consensus range A$95.8-103.5m; average A$98.6m). Given subdued PDL supply conditions, we expect CCP to take a conservative position on FY22 guidance.
Analysis: Divisional outlook into FY22 and beyond
AUS PDL supply: Excluding the CLH book purchase, CCP will acquire ~A$85m of PDLs in FY21, well down on ~A$140m average over FY18-20. Consumer credit balances have been depleted (see overleaf), which will take time to rebuild.
We expect the low point has passed and supply will start to increase from: inventory sales commencing post moratoriums lifting; steady recovery in consumer revolving credit (and defaults); and the potential for larger transactions or the return of a major seller.
USA PDL supply: US debts sales are also ~45-50% below pre COVID-19 levels, with major US buyers expecting a rebound in early CY22. We expect CCP to be able to step-up USA purchasing given their low market share and available capital.
Lending: As at 3Q21, CCP’s lending volumes were ~10% below pre COVID-19 levels with the gross book ~23% below. We expect volumes have continued to rebound (close to 100% of pre COVID-19 levels) and expect the lending book to rebound to ~A$198m in FY22 (up 17% on 1H21). Executing on product expansion (auto lending) is required to drive medium-term divisional growth.
Capital capability: We forecast closing FY21 net cash of A$54m, with ~A$312m of undrawn debt capacity. Any uplift in capital deployment (additional supply; book acquisitions; corporate acquisitions) will be highly accretive.
Forecast and valuation update
We make no changes to forecasts or valuation (DCF/PE valuation of A$33.45ps). We note our FY22 forecasts are ~3% below the consensus average.
FY22 assumptions include: PDL purchasing A$230m and the FY22 closing lending book A$198m, up ~8%.
Investment view: Upgrade to Add recommendation
Upgrade to Add recommendation.
Short term, we note that guidance may underwhelm and extended AUS COVID-19 lock-downs may see heightened share price volatility.
Our upgrade is based on a medium-term view, with the group having visible growth drivers: we expect AUS PDL supply to improve over FY22/23 and see the potential for larger transactions to add to purchasing; we expect CCP to capitalise on the market share opportunity in the USA; and a rebound in consumer lending.
CCP result 3 rd August, 2021.
Capital deployment via large inventory purchase or acquisitions.
FY22 guidance below consensus average may result in short-term weakness.
Extended COVID-19 related lock-downs, causing debt sale/collection moratoriums. Structural industry change impacting supply; reputational risks; regulatory risks.
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