Finding an entry point for Credit Corp

Shares in Credit Corp Group (ASX:CCP) blasted higher on the day of their half yearly results. With the share price since easing back, when is the best time to buy it? We look at the fundamentals and technicals.

About Credit Corp Group

Credit Corp Group has two main business segments. The major contributor to group profit is the purchase of debt ledgers from banks, financial institutions, telecommunications and utility companies in Australian and NZ. The debt purchasing segment also includes debt purchasing operations in the US and its financial results are reported separately. The second business segment in which CCP operates is consumer lending. In this, the majority of the Company’s loan book is derived from the Wallet Wizard product. This is a low-cost online provider of loans up to $5,000.

Key Factors Underpinning Earnings Growth

The 1H19 result was characterised by favourable trading conditions in the US Purchased Debt Ledger (PDL) market. It also saw continued growth of its domestic consumer loan book. The strong performance in these two businesses offset the slowing contribution from the domestic PDL segment. At the interim results release, the Company upgraded FY19 Net Profit After Tax (NPAT) guidance of between $69-70m. This implies a growth rate of 7-9% on FY18.

As has been the case over the last two years, the key driver of earnings growth remains. Firstly, the continued reliance on the continued growth of its consumer loan book. Secondly, an improvement in profitability in the US PDL market on the back of further share gains off a low base. In contrast, the domestic PDL business (which remains the biggest contributor to revenue and earnings) has reported flat contributions in recent periods.

Navigating the Challenges in the Domestic PDL Market

The domestic PDL business is mature and highly competitive pricing pressures have limited CCP’s ability to grow market share. CCP, which is the largest player in the domestic PDL market, has reported a subdued level of debt purchasing since 2H17. This is given that competitive market conditions have inflated prices and the Company’s response to this has been to not pay up for debt purchases.

The high level of pricing as a result of the strong volumes of debt purchasing being undertaken by competitors is a cyclical factor. As pricing pressure eases, CCP only needs a modest increase its domestic purchasing activity over a 2-3 year period in order to maintain similar levels of profitability over the medium term.

Further, in the event that competitors overpay for acquisitions, CCP retains the balance sheet capacity to purchase secondary market debt from competitors. This is more profitable than primary PDL purchases.

To offset the ongoing challenging market conditions, CCP has focussed on improving the efficiency of domestic PDL collections. This is evidenced by a 7% increase in the FY19 year-to-date average PDL collections per hour in 1H19 compared to 1H18. This rate of growth has been broadly in line with the growth rate in recent years.

US PDL Business Remains a Significant Opportunity

Having progressively reduced losses in its US business over the course of FY15 to FY17, the US PDL business reported its first profit in 1H18. In 1H19, the US PDL business more than doubled NPAT. However, this is from a low base (from $0.6m to $2.6m). The Company continues to point to favourable conditions in the US PDL market. This is due to continued growth in unsecured credit issuance and charge-off rates which remain below historical levels.

CCP have bullish, but achievable expectations for profit growth for its US business. These are underpinned by factors such as:

i) Debt purchasing continuing to grow (contracted purchasing pipeline was up 23% in 1H19),
ii) Closer relationships with the major debt sellers,
iii) The ramp up of the existing call centre facility and
iv) Better cost control (i.e. the Company had some difficulties retaining staff in a tight market for call centre personnel, which has since been rectified).

Fundamental View of Credit Corp

Whilst mindful of CCP’s key fundamental attractions (strong balance sheet; effective use of capital; long-term earnings growth potential in the US PDL market & strong consumer lending product offering), we consider that the prospect of increased competitive pressures in the domestic PDL segment is the key factor limiting any significant re-rating in the share price.

In addition, the Company faces regulatory risks, although this has abated recently. The Royal Commission findings are likely to have no impact on CCP’s operations; and the Senate Enquiry report (due for release on 22 February 2019) did not contain any submissions or recommendations that would be adverse, according to the Company.

The best entry point for Credit Corp is therefore one which is much lower than current levels. So let’s look at the chart.

Charting View of Credit Corp

The last 12 months has been volatile for CCP, with the shares trading in a range between about $18 and $24. It is now retreating from the top of that range.

After jumping on the day of their half yearly results, the shares have come under a little bit of selling pressure. This tells us that we are unlikely to see it push beyond nearby resistance levels. For the short term, there is a good chance that CCP continues to drift back here towards those sub-$20 levels. Those looking to invest in CCP can therefore wait for cheaper prices.

Credit Corp Group (ASX:CCP) weekly chart
Credit Corp Group (ASX:CCP) weekly chart


Michael Gable is managing director of Fairmont Equities.


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