In mid-December 2024, analysed Credit Corp Group (ASX:CCP) in The Dynamic Investor. The key factors underpinning our view was that the market was starting to expect a step-up in performance of the US PDL business. This was based on peer commentary and evidence of improved market conditions in the US. To this end, the interim result (1H25) was seen as a key upcoming catalyst. This explains the run-up in the shares to its recent high of $18.24 per share on 29 January (the day prior to the interim results release).
The shares have de-rated following the interim results release. Accordingly, we assess whether current levels present another entry opportunity.
About Credit Corp Group
Credit Corp Group has two main business segments. The major contributor to group profit is the purchase of debt ledgers (or ‘PDLs’) from banks, financial institutions, telecommunications and utility companies in Australia and NZ.
CCP takes legal ownership of the underlying account/credit contract and assumes the rights (and obligations) to recover customer payments under the terms of the original loan or credit contract. The debt is acquired at a discount to its face value and CCP looks to achieve a return by collecting a multiple (generally 2.0-2.5x) of the capital outlaid. The debt is typically collected over an extended period with consumers entering into a ‘payment arrangement’ (usually three to five years).
The debt purchasing segment has also includes debt purchasing operations in the US and financial results for the US business are reported separately.
Key Fundamental Drivers
Consumer Lending Segment Delivering Consistent Earnings Growth
The Consumer Lending segment has progressively increased its contribution to group earnings in recent years. The segment now accounts for 50.9% of underlying Net Profit After Tax (NPAT), up from 38.4% in FY23 and 21% in FY22. Consumer Lending and is expected to continue to be a material contributor to earnings albeit expected moderation in book growth in FY25.
CCP reported 5% growth in the consumer loan book to a record closing balance of $465m. Rapid consumer loan book growth in the prior year has converted to earnings, with the segment’s NPAT up by 79%. Lending volume fell below the prior year as industry data showed that a period of post-COVID re-leveraging had come to an end. Notwithstanding this, the loan book still grew over 1H25. These dynamics should produce strong segment earnings over 2H25 and record segment NPAT for FY25.
While the Wallet Wizard fast cash loan product has been a key driver in lending segment earnings to date, other products are set to contribute to future growth. These products include Auto and Wizit digital credit card.
Earnings Lift Needed in US Debt Buying Business
A deterioration in operating conditions in US collections since late FY23 (in particular increased repayment plan delinquency) resulted in the Company taking a decision in 1H24 to impair the opening US ledger book by $65m or 14% of the balance.
An improvement in operational performance combined with favourable supply conditions in the US supported results for the US segment in FY24. Operational performance in 1H25 continued to improve, with collections +12% and labour productivity +28%.
The improvement in collections was achieved despite 24 months of reduced investment and no discernible change in collection conditions. Over the short term, conditions are likely to remain difficult, with a lag on clients previously expected to come to market. The Company have also noted evidence of elevated levels of delinquency and payment plans.
CCP anticipates outlaying a A$150m target in the US over FY25, having already outlaid ~A$50m in 1H25. If the Company achieves the A$150m target, the implied 2H25 investment of ~A$100m puts the group on track to acquire the required ~A$200m per annum to leverage the cost base. This would enable CCP to deliver a more meaningful step up in earnings towards the previously-stated medium-term NPAT target of ~A$50m based on targeted Return on Equity. In context, NPAT in 1H25 rose by 16% to A$7.1m.
Subdued Trading Conditions for Domestic PDL Business
The Australia/NZ debt buying market has remained subdued, with sale volumes still substantially lower than pre-COVID levels. Run-off in the Australian and NZ debt buying book stabilised during 1H25, with segment NPAT falling by just 10% compared to 1H24. While there are still no signs of a recovery in market sale volumes, segment earnings are not expected to fall significantly further. A return to earnings growth looks unlikely in the near-term with CCP noting that competition has intensified.
Notwithstanding the competitive intensity in the market, CCP has enjoyed a strong market share in recent years. Market share has been supported by flat-to-slight decline in PDL pricing, as well as CCP’s PDL purchasing profile, which has been augmented by the acquisition of competitors’ books.
Increased Balance Sheet Capacity
The Company’s gearing position remains conservative and balance sheet capacity has increased slightly under an expanded facility. CCP have increased its borrowing capacity for opportunistic investments with facilities expanded to $505m, with ~$165m in capacity (undrawn debt and cash). The refinancing ensures the Company is positioned to seize any acquisition opportunities given higher gearing positions across some competitors.
Fundamental View
At current levels, the shares continue to present value – trading on a 1-year forward P/E multiple of ~10x. This multiple is below the 5-year low and below the average multiple of ~15.5x over the same timeframe. However, we consider that the prospects for a re-rating from current levels is limited predominantly by the lack of earnings growth in the US segment. As such, the market continues to await more tangible evidence of execution in the US.
Charting View
Following on from the bounce in early 2024, CCP has been unable to make any higher highs and it appears at risk of falling further from here. We would be looking at support to now come in near $14.
Michael Gable is managing director of Fairmont Equities.
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