Credit Corp Group Limited (ASX: CCP) is comprised of three main businesses, the first, which makes up almost two-thirds of the company, is a post due debt collection business.
What Does Credit Corp Do?
They operate by purchasing overdue debt ledgers (PDLs) mainly from the banks; they pay close to 20 cents in the dollar for the loans and generally collect 60 cents over the next four to five years.
This business is the largest and most disciplined in the country with close to 40% market share. They have also demonstrated a consistent record of efficient buying and collecting.
Known for erring on the side of caution, they have a history of taking a step back during times of exuberant pricing, a move the market often perceives as negative but we feel shows restraint.
The second business, making up a quarter of the company, is a consumer loans business. Here they have constructed a loan product that solves a problem facing regulators. That is, from people who cannot get a loan from the bank yet need credit. Credit Corp provides loans without falling into the payday lending category. This product is the cheapest in the market, has regulatory approval and funding from Westpac Banking Corp (ASX: WBC).
Under-Promise & Over-Deliver
Particularly important to note is their conservative presentation of results, across the business but especially in the consumer loan business. Every time they write a loan, even if it has a two-year duration, they take the full loss that they expect on average across the book – they assume for every $100 they lend out they will lose (and write-off) $20. This is a significant factor as it means the faster this business grows the lower the reported profitability, but the better the underlying profitability will be going forward.
The third and final business is where Credit Corp has focused their existing expertise on entering the PDL industry in the USA. So far, they have booked all their losses associated with the new business and have again shown great discipline in their approach.
When debt pricing was irrational they exhibited admirable restraint. However, with the recent resurgence of the US economy, PDL book prices have come down and Credit Corp has been able to take full advantage. Despite their bottleneck being their ability to sharply ramp up the number of trained personnel collectors, the US is a large growth market for the company, equivalent to ten times larger than Australia. They may currently be one of the smallest players in this market but they are growing rapidly.
Is It A Good Business?
This business is disciplined and generates, even with conservative gearing and accounting, a high return on equity. Historically, the company has also demonstrated a remarkably stable core business through different economic cycles, underpinned by the fact that there is a core segment of the population who will always spend more than they can earn — creating consistent demand.
In addition, as a result of having critical mass, Credit Corp have access to a massive database which allows them to accurately predict reasonable purchase prices and compare book quality. This is something a company with a smaller customer base wouldn’t be able to do as well.
Is The Management Team Competent?
Credit Corp CEO Thomas Beregi started his position in 2008 after the global financial crises, a time when the business and industry were in a state of disarray. Since that time Thomas has been able to grow the company at a remarkable rate by consistently under-promising and over-delivering, which is a key factor for us.
Can We Buy It At The Right Price?
The stock is available on a 7.5% after-tax cash earnings yield, or around 13.5x price to earnings ratio. Given the underlying resilience to earnings and their future growth prospects, we think this offers an excellent entry point.
The Short Report
Credit Corp can’t be discussed without also addressing the recent short report published in June by an anonymous author on online blogging site, HotCopper, the consequences of which were a temporary trading halt.
A short report is a negative report on a company that recommends shorting its stock. This is something we took full advantage of as it resulted in a 20% drop in share price, allowing us to purchase a significant number of additional shares in Credit Corp at a discounted price. The share price has now recovered and is trading at the same price it was previously. We remain their biggest shareholder.
Why Credit Corp?
We believe Credit Corp to be a sound investment and have purchased its stock for these main reasons:
- It’s a well-managed financial services business that’s diversified across Australia, New Zealand and the United States – in terms of its PDL Collections business.
- It has a rapidly growing consumer loan business.
- Westpac funds Creditcorp at a low cost of debt, highlighting their interpretation of the inherent corporate credit risk.
- The company has grown its earnings and dividends consistently over the last ten years.
- Management is credible and consistent.
This article contains general information only and is issued by Pengana Capital Limited (ABN: 30 103 800 568, AFSL 226566). The information does not take into account your needs, goals or objectives. Therefore, you should speak to a qualified financial adviser before acting on the information.