Credit Corp Sets Sights On US Expansion

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While the Australasian market remains benign, Credit Corp has set its sights on US expansion, where it is now buying debt ledgers from the largest seller in that market.

-Strong growth in US revenue offsets reduced purchasing of debt ledgers in Australasia
-Opportunities to diversify in Australian consumer lending and automotive loans
-Few risks envisaged in association with the Senate inquiry
 

By Eva Brocklehurst

Receivables management company Credit Corp ((CCP)) is enjoying robust conditions for purchased debt ledgers in the US, continuing to build its profile. The company has observed strong unsecured credit growth in this market and is now buying from the largest seller in the US.

Meanwhile, the Australasian industry remains competitive, with domestic credit card statistics pointing to little movement in aggregate balances over the last two years. Arrears on personal loans provided by the banking sector remain generally benign.

First half net profit was $33.6m, up 12.7%. The interim dividend of $0.36 per share was slightly ahead of broker forecasts. Net profit guidance for FY19 has been slightly upgraded to $69-70m, based on origination volumes and purchasing activity for the year to date.

The company reported strong growth in US PDL (purchased debt ledger) revenue offsetting the impact of reduced purchasing in Australasia. Credit Corp will open another collection facility in the US in the medium term.

For the past couple of years Ord Minnett has been concerned about returns in the Australian PDL market, as meaningful capital was added by a number of competitors. Credit Corp is the largest player in this market and management recognises the current dynamic, effectively guiding to a benign FY19 result in Australia.

PDL acquisition and lending guidance has been increased by 10%, supporting FY20 growth expectations. The company has a strong track record of deploying its capital accretively and Ord Minnett considers current earnings expectations are readily achievable.

However, the broker believes the risk/reward is now more balanced, particularly with the uncertain macro-economic backdrop developing in Australia, and downgrades to Hold from Accumulate with a $23 target.

Bailieu also downgrades to Hold, purely on valuation, with a $23.90 target. The broker continues to rate the stock highly, as it is on target to deliver earnings growth in what was originally expected to be a transition year, as capital is allocated towards the US and away from Australasia.

Opportunities

Still, Ord Minnett points to a number of other opportunities in which to deploy capital such as US PDLs, Australian consumer lending and automotive loans. This should enable the company to maintain return hurdles and minimise any impact by diversifying from the Australian PDL market.

Canaccord Genuity also believes the domestic banking environment presents an opportunity for shadow lenders such as Credit Corp. Automotive lending is one area where the company is under-represented as it has a loan book of less than $20m versus a $6bn annual market for used-car financing in Australia.

Canaccord Genuity maintains a Buy rating and a $23.03 target. The broker notes Credit Corp has one of the best balance sheets and lowest cost of funding in the sector, able to take market share where the returns are justified. Group profits are expected to grow at double-digit rates, despite the cyclical tightness in the domestic debt purchasing market.

Morgans suspects competitive pressure may start to erode domestic debt buying earnings but growth should come from consumer lending and US debt buying. While acknowledging the stock is relatively fair value on a short-term basis, the broker has an Add rating because of the visible earnings growth in upside potential from the US business, retaining a $24.10 target.

Risks

Risks lie in regulation and consumer advocacy within the lending division, domestic PDL competition and execution in the US, Morgans points out. The current Senate inquiry is due to report in February 22 but the broker expects the company's products will not be affected, although the implications from the review are not assured.

The company has indicated that no regulator or industry advocate has made any recommendation that would affect its current products. Bailieu agrees the Senate inquiry into consumer-facing lending, debt consolidation and deferred payment operators is most likely benign for Credit Corp.

Fears regarding changes to domestic consumer lending regulations are also fading. Still, Bailieu suspects the Hayne Royal Commission is having some impact on the behaviour of debt sellers and supply is, as a result, tighter.

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