Credit Corp: Stepping up the USA

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
05 November 2021, 8:30 AM
Sectors Covered:
Diversified Financials, Professional Services

  • Credit Corp's (ASX:CCP) 1Q22 shows the group is on track for growth in FY22 (+8% at the top-end of guidance), and on-track in executing on the material USA opportunity.
  • Guidance was maintained, with PDL purchasing guidance tightened to the top-end.
  • CCP has secured A$210m of PDLs for FY22, with A$150m in the USA. Achieving (and sustaining) ~A$200m USA PDLs provides a visible growth path.
  • Add rating maintained. The group’s earnings capacity is significantly higher based on its well established USA business. CCP’s balance sheet strength (~A$100m by FY22-end) provides acquisition upside.

1Q22 – solid start to the year

PDL collections: Group 1Q22 collections were down 3% on the pcp and up 20% on 1Q20. The pcp benefitted significantly from Covid-related government stimulus. 1Q22 ANZ collections of A$93m were down -7% on pcp and up 11% on 1Q20.

US collections of A$37m were up 6% on pcp and +48% on 1Q20 (constant currency). Collections efficiency improved on the pcp (+7.6% to A$323 collections per hour), being driven by lower collections headcount in the USA (headcount flat in AUS and down 8% in USA). CCP stated the operational capacity was recovering with a return to ‘normal’ labour markets in the USA. Total headcount was slightly up (+1.5%) on 4Q21, driven primarily by increasing in Lending FTE (up 16%).

PDL Purchasing: A$210m of PDLs has been contracted to-date (vs A$220-240m guidance). Composition is ~A$55m ANZ and ~A$155m USA. Supply conditions remain very weak in ANZ, with recovery pushed out by recent lockdowns.

We estimate ~A$100m of purchasing is required in FY22 to sustain ANZ PDL earnings (which looks difficult at this stage) and ~A$130m required for FY23. We expect ANZ supply to improve, but achieving the required volumes poses a small headwind into FY23.

Lending: The gross book was down ~6.5% (from June-21) to A$172m (A$153m pcp), impacted by a seasonally quiet period and Covid lockdowns. CCP noted that volumes have experienced solid recovery post lockdowns ending, with Oct-21 volumes back to 94% of pre-Covid levels (having hit a low of 84% in Aug-21).

New products for the longer term

CCP has three new product developments in pilot. Auto Lending was relaunched in 4Q21 and has hit record monthly volumes (although we note is still very early / subscale). CCP has commenced a US Consumer Lending pilot which has potential given the depth of the market, but we expect CCP to take a cautious approach to developing the product.

CCP has also launched a BNPL product which we see as more of a ‘customer acquisition’ strategy rather than a serious contender in the segment at this point.

Guidance maintained; no forecast changes

CCP maintained all guidance metrics, with PDL purchasing tightened to the top-end of the range. We make immaterial changes to forecasts.

CCP’s NPAT guidance of A$85-95m is wide, with our forecast sitting marginally ahead of the top-end. We expect CCP is on track to deliver at/around the top-end of guidance, but we do not expect any material outperformance of this level (in the absence of any acquisitions).

Add maintained; USA opportunity provides visible growth

Add rating maintained. We view CCP as having a visible medium-term growth profile: we expect AUS PDL supply to improve over FY23 (with the potential for larger transactions / an acquisition 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 (FY23) earnings.

Price catalysts

Capital deployment via large inventory purchase; USA PDLs or acquisitions.

Risks

Extended Covid-related lockdowns, causing debt sale/collection moratoriums.

Structural industry change impacting supply; reputational risks; regulatory risks.

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Disclaimer: 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.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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