I topped up my holdings at $9.40 just this week
Donald Mclay who is chairman of the company is also chairman of Torress Industries (a private investment fund). Torress Industries increased its stake in Credit Corp by 50,000 shares recently at a price somewhere between $9.50 and $10 per share.
Credit Corp (CCP) is currently paying $0.44 per share in fully franked dividends albeit with a dilutionary DRP (dividend reinvestment plan) in place. This represents a yield at the last traded price of $9.49 of over 4.6% fully franked. My forecast for FY2016 is that they will slightly beat the top end of their guidance and produce earnings per share of at least $0.90. This represents a forward p.e. of less than 11 times.
My long-term (5-10 years) outlook for the company is that they will compound earnings per share in the low double digits while paying good dividends.
My opinion of the long-term outlook:
-Australian PDL business: this is a mature business with no real growth prospects. Expect variations in year to year purchasing volumes but generally there is unlikely to be any growth over the long-term. If you look at the percentage of past 90 day plus due debts being sold to debt collectors it is higher than America and the U.K. and possibly the highest in the world (if not it would be close to it). Basically every worthwhile bad debt that can be sold is being sold. Also growth in unsecured personal/consumer debt is quite low (as opposed to growth in mortgage debt) meaning the market is not growing much meanwhile all the debt collection companies who have plenty of access to capital and are looking for growth are demanding more and more bad debts and hence bidding up prices. Credit Corp must and is continuing to improve productivity however the benefit of productivity improvement (only a few percent a year as the low hanging fruit has already been picked) is going to the vendors (in the form of higher prices for bad debts) of bad debts (banks, etc) rather than to debt collectors.
My prediction therefore is that volume will generally fluctuate year to year but will be largely static over time and returns will remain broadly the same (rising productivity and disciplined purchasing will offset rising PDL prices).
-Consumer lending business: they are well below legislated maximum interest rate caps for their products and are operating in a market that has some competition but is far from fiercely competitive. They also have the advantage of having an existing costumer base to cross-sell into. The customer base I refer to is the bad debts on their PDL books. Once somebody on the PDL book pays of the debt in full and has a reasonably consistent repayment history, Credit Corp can then turn around and offer them a short-term loan. There are plenty of initiatives to boost productivity and broaden the product range in this business as it is still early days. Also they are under-reporting profits in this business compared to the cash flow it generates. They are upfront provisioning for bad and doubtful debts because of early adoption of a proposed new accounting standard which competitors have yet to adopt. While competitors write off bad and doubtful debts as they occur they are writing it off (based on a forecast) upfront as soon as the loan is made. The actual bad debts they are experiencing is less than forecasts and hence they are arguably over-provisioning and hence under-reporting profits. Productivity improvements will be reinvested into marketing spend and lower product pricing to grow the loan book over time. I expect this business to experience rapid growth over the next 2-3 years and well beyond.
-U.S. PDL business: They are currently losing around 2.5 million AUD per year in this business. They must maintain a certain size and number of staff to be able to bid for PDLs and be taken seriously, and to be able to ramp up volume should the opportunity occur. I spoke to the company CFO. He believes even without increasing PDL purchasing they will be able to get the business to break-even in less than 2 years solely via productivity improvements (plenty of low hanging fruit here). In the U.S. market partially due to regulatory uncertainty as well as a few other factors many of the big banks in the U.S. are keeping bad debts on their books (and collecting themselves) rather than selling them to debt collectors. This has resulted in depressed volumes of PDLs being sold into the market and unsustainable high prices (and thus low returns) for PDLs. At some point the market conditions will improve and PDL volumes will rise and prices will fall. Credit Corp will then be able to rapisly expand this business to become a substantial earner. Although this segment will hit break-even within 2 years it is unlikely to earn much (if anything) for at least the next 3 years. However in 10-15 years time I expect it to be a bigger earner than the Australian PDL business.
