Credit Corp: Capital strength

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

02 February 2022, 10:00 AM

Sectors Covered:

Diversified Financials, Professional Services

• Credit Corp (ASX:CCP) delivered 1H22 underlying NPAT of A$45.7m, up 8% on pcp. Strong lending volumes (upfront provisioning) slightly dragged on the result vs expectations.
• FY22 NPAT guidance was reaffirmed at A$92-97m, with PDL buying guidance increased ~7% (to A$300-320m).
• AUS/NZ PDL supply remains subdued, with slight improvement commencing (short-term assisted by inventory transactions like Radio Rentals). Strength in the USA pipeline (~A$155m contracted) is positive for FY23/24 growth.
• CCP’s balance sheet (slight net cash; ~A$313m debt capacity) provides optionality.
• CCP’s valuation is reasonably full (~21x FY23F PE), however we see upside earnings risk from further capital deployment (primarily acquisitions) over a 12-18 month period and retain our positive view on this basis. Add maintained.

Event: Solid 1H22 result

Credit Corp (ASX:CCP) reported 1H22 NPAT of A$45.7m, up 8% on the pcp and ~4% below our expectations. The slight ‘miss’ versus our forecast resulted from higher upfront loan provisioning (accelerated volumes over Nov/Dec).

We had expected CCP to utilise some of the provisioning strength, however the consumer loan book remains conservatively provisioned at ~26.7% (vs ~18.7% pre-Covid levels).

Reported NPAT (A$50.2m) benefitted from a US Paycheck Protection Program loan forgiveness (A$4.5m). Interim dividend 38cps (+5.6%). Net cash of A$1.1m.

Divisional NPAT composition included (on pcp): AUS debt buying +5% to A$29m; USA debt buying +31% to A$10.5m; Lending down 7% to A$6.2m.

PDL cash collections increased +8.8% to ~A$272m, which was driven by AUS/NZ collections up ~6% to A$191m (including a part contribution from Radio Rentals) and the USA up ~15% to A$81m.

The gross Lending book closed at A$200m, +16% for the qtr and +8% for the half.

Analysis: AUS core PDL buying remains difficult; USA accelerating

FY22 guidance includes: NPAT A$92-97m; PDL acquisitions A$300-320m (increased by A$20m); and net lending A$45-55m. The PDL contracted pipeline stands at A$293m (~A$155m USA; ~A$60m RR; ~A$78m AUS core).

The USA division remains on track for an earnings step up, with CCP’s intention to move to and sustain ~A$200m purchasing. USA collections accelerated over the half (1Q A$37m; 2Q A$44m) on the back of improved purchasing. Operational capacity remains the current constraint, with headcount growth to 600 (from 374) required.

PDL purchasing guidance implies ~A$100m of AUS core buying, still significantly below the required levels to maintain AUS profitability (~A$160m). The addition of Radio Rental will assist 2H22/FY23, however volumes will need to build through CY22 to prevent a headwind to AUS divisional profitability.

Consumer Lending experienced a strong volume recovery in Nov/Dec (up ~25% on pre-Covid-19 volumes), resulting in book growth to A$200m (+16% for the qtr). CCP expect the division to deliver ~A$12m 2H22 NPAT (from A$6.2m in 1H22).

Forecast and valuation update

Minor changes to forecasts. Our forecasts sit slightly ahead of guidance. (login to view price target)

Investment view

Add 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.

Whilst CCP’s near-term valuation is fair, CCP’s balance sheet position provides optionality and medium-term upside earnings risk.

Price catalyst

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

Risks

• Lower than expected PDL supply/competitive pressure;
• Structural industry change impacting supply;
• Reputational risks;
• Regulatory risks.

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