Credit Corp: Two out of three ain’t bad

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

27 April 2022, 10:30 AM

Sectors Covered:

Diversified Financials, Professional Services

• Credit Corp (ASX:CCP) reaffirmed FY22 earnings guidance and increased PDL and net lending investment guidance. AUS debt sale volumes remain subdued, which is being offset by higher investment in USA PDL’s and accelerated lending volumes.
• Whilst earnings pressure is faced within AUS PDL’s, the profit recovery in Lending and ramp-up of USA capacity supports solid growth in FY23 and medium-term.
• Key medium-term risks include the lack of volume recovery in AUS; inability to continue to invest in the USA (labour constraints); and a significant slow down in cash collections (before pricing adjusts). Countering the risks, CCP maintains a strong balance sheet position for any one-off/acquisition opportunities.
• CCP’s current valuation is reasonable (~18.5x FY23 PE vs ~20x med-term average); however we regard the growth profile as having solid visibility and CCP’s strong balance sheet position as providing growth optionality. Add maintained.

Event: 3Q22 update

CCP reaffirmed FY22 earnings guidance (A$92-97m); increased PDL investment guidance (to A$345-355m from A$320-330m); and materially increased net lending guidance (to A$70-75m from A$45-55m).

AUS PDL purchasing: CCP’s expects PDL purchasing of ~A$170m, with ~A$75m relating to one-off purchases (Radio Rentals and CLH NZ book) and ~A$95m in core ‘direct from issuer’ purchases.

Core purchasing remains down ~45% on pre-COVID levels, with no near-term volume recovery expected (Cr card balances and arrears remain at historical lows).

One-off purchases have filled the gap, however the cash collections profile of these purchases (Baycorp, CLH books, Radio Rentals) runs off more rapidly (with the impact more pronounced in FY24+).

USA PDL purchasing: The USA PDL purchasing pipeline stands at ~A$180m, up from ~A$80m in FY21 and up ~50% from A$120m in FY20. The recovery in USA consumer lending balances is resulting in higher forward flow volumes (CCP stating a ~15% increase in recent months), with the major US buyers expecting a meaningful volume recovery by CY22-end.

CCP’s challenge in the US is an extremely tight labour market (headcount went marginally backward in the March quarter despite recruitment efforts), which is suppressing divisional earnings.

Strong earnings growth from the division is still expected (FY23), with collections initiatives including utilising the Philippines workforce.

Lending: Net lending guidance was increased to A$70-75m (from A$45-55m at 1H22) and volumes are now 134% of the pre-COVID period (Mar-19). CCP expects the gross lending book to close FY22 at A$230m, up 15% on 1H22 and +25% on the pcp.

Advertising has resumed to capture the heightened demand. Higher volumes typically drag on reported earnings (upfront provisioning), however we note CCP has retained elevated provisioning of the book (26.7% vs 18.7% pre COVID) which we expect can be utilised given loan book performance.

FY22 earnings guidance maintained; ~2-3.5% EPS downgrades

Formal guidance now stands at: NPAT A$92-97m (no change); PDL investment A$345-355m (comprising AUS ~A$170m and USA ~A$180m); and net lending A$70-75m (resulting in a gross book of A$230m for FY22-end).

We downgrade FY22-24 EPS by ~2-3.5%, driven by higher lending volumes (near-term) and lower expected US collections (med-term). Our PE/DCF valuation moves to (login to view) on forecast and RFR changes.

Investment view

Add maintained. We view CCP as having a visible medium-term growth profile: we expect AUS PDL supply to improve over FY23/24 (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.

Whilst CCP’s near-term valuation is reasonable (~18.5x FY23 PE vs med-term average of ~20x), CCP’s balance sheet position provides optionality and medium-term upside earnings risk.

Price catalysts & Risks

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

Lower than expected PDL supply/competitive pressure; structural industry change impacting supply; reputational risks; regulatory risks.

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