The Credit Corp Group Limited (ASX: CCP) share price jumped over 19% on Thursday following a price-sensitive announcement which provided investors with updated guidance figures.
Shares are still down around 20% from their pre-COVID levels, but have returned a staggering amount of over 700% over the last 10 years.
Credit Corp background
Credit Corp is Australia’s largest provider of debt purchasing and consumer lending services with operations also in the US, New Zealand and the Philippines. It listed on the ASX in 2000 and currently forms part of the S&P/ASX 200 (ASX: XJO) index.
The company primarily generates revenue by purchasing consumer debts at a fraction of their face value and attempting to collect the full amount from the customer.
What was the announcement?
The CCP share price surged as a result of Credit Corp announcing it would acquire the Australian ledger book of Collection House Limited and increase its FY21 earnings guidance figures.
Under the acquisition, the company will acquire the ledger book for a total consideration of approximately $160 million, plus the provision of a short-term loan of $15 million which is expected to be paid back within nine months.
Credit Corp will pay for the ledger book fully from cash reserves without needing to draw on its unutilised funding line of $375 million.
Acquisition rationale
Collection House is another Australian debt collection business that has run into some troubles recently.
Earlier this year, the company had to write down the value of its purchased debt ledger (PDL). This subsequently resulted in breaches in certain financial covenants under lending arrangements as there was a reduction in the carrying value of the PDL assets.
As part of the restructuring process, Collection House has made the decision to dispose of these assets to Credit Corp and use the proceeds to pay down its senior debt.
Crunching the numbers
This acquisition is expected to improve Credit Corp’s 2021 net profit by approximately $10 million. On a per-share basis, this is an increase of around 15 cents per share.
Prior to the announcement and the jump in share price, Credit Corp shares were trading on a forward price/earnings (P/E) of around 24x based on initial guidance.
Assuming the multiple holds, increased guidance of 104-126 cents per share would give a rough share price of around $27.7 per share. The market has since valued shares slightly higher at $29.7 per share, which is a forward P/E of around 25.8x.
Whether this will be a permanent re-rating of Credit Corp’s shares or if the share price will settle slightly below today’s levels I could not say for certain.
Are Credit Corp shares a buy?
I liked Credit Corp shares a lot more the last time I wrote about them, when they were around $19.
That being said, it’s important to try to look ahead and not anchor too much on a previous share price.
Credit Corp is Australia’s biggest debt collection company and it could be possible that it will be able to buy even more discounted debt ledgers funded by its fortress-like balance sheet.
Its business model is extremely profitable and has assisted the company in growing both revenue and profit significantly over the last several years.
The main concern that’s weighing on the share price is the unfolding COVID-19 situation in the US.
Credit Corp does have some exposure to this market, so it would be worth considering how rising unemployment might have an impact on collection rates.
I’m not sure if shares are a buy straight after the jump in the share price today, but Credit Corp is one I’d one to add to my watchlist.
For some more share ideas, click here to read: 3 ASX shares to add to your 2021 watchlist.
