Where Is The Upside For Credit Corp?

This story features CREDIT CORP GROUP LIMITED. For more info SHARE ANALYSIS: CCP

Credit Corp delivered its traditionally conservative guidance at its FY19 results and brokers assess where the upside may lie.

-Is guidance even more conservative than usual for FY20?
-Second US debt acquisition facility to be opened in the December quarter
-Strongly positioned with capital options on the balance sheet
 

By Eva Brocklehurst

In keeping with tradition, Credit Corp ((CCP)) has delivered conservative guidance for FY20, implying book growth of around 12% and net profit growth of 7-10%. Debt has started off the financial year at a lower level and this should result in less interest expense.

Guidance for FY20 is disappointing, at $75-77m, despite broker suspicions it may be conservative given the company's track record of providing a cautious outlook at the start of each financial year. Credit Corp is particularly conservative regarding purchased debt ledger acquisitions.

Canaccord Genuity believes guidance for FY20 is more pessimistic than usual, counteracting some fairly bullish consensus forecasts at a time when the stock is trading at record forward multiples.

Yet, the broker concedes, little has changed in the business outlook. In trying to assess where the conservatism lies, the broker notes consumer lending is pivoting towards automotive finance where the economics could be worse.

The company also expects to open a second US collection facility in December and is likely to be investing ahead of the curve in both debt ledger assets and staffing. An efficiency lag, therefore, may not be captured in analysts' modelling.

While contracted purchased debt ledgers (PDL) are lower than where the company was positioned in the prior year, the guidance range is much higher. Some reasons behind this, in the broker's view, could be expectations for expanded investment in the US or some bullishness, perhaps, about possible market share gains in Australia.

The guidance is also likely to be subdued because the $140m in fresh capital has not been deployed as yet and contracted purchasing of $51m is less than 20% of planned expenditure.

Moreover, Canaccord Genuity, on its calculations, assesses management is either not counting the cost savings on interest or believes the domestic PDL business is going backwards. While aware that the domestic PDL business is suffering from under-investment the broker points out purchasing guidance remains healthy and some of this should relate to domestic operations.

Morgans assesses FY20 will benefit from an earnings uplift in the US, a 16% increase in the consumer lending book and significantly lower debt. The broker acknowledges its positive view has an element of faith in management's ability to deliver on its of 16-18% return-on-equity target. Morgans sets a price target of $27, at a 10% premium to valuation, and maintains an Add rating.

Canaccord Genuity has upgraded to Buy from Hold, with a target of $25.03, assessing the market is buying Credit Corp for defensive growth, although the range of possible outcomes for net profit is arguably wider than usual this year.

Automotive Lending

Credit Corp has stated that further expansion of its automotive lending pilot will be subject to ongoing review of underwriting accuracy. Automotive settlements doubled in FY19, almost entirely ascribed to the "finance only" product, which suggests to Canaccord Genuity the company has aspirations for further growth.

Morgans notes that the "finance only" product will incur around 20% of upfront provisioning if the company accelerates originations, which will, in turn, create some drag on reported earnings during a growth phase.

Meanwhile, the company has increased its US head count to 363, up 69%. A second facility will be opened in the second quarter of FY20 to take the total personnel capacity to 700. At full capacity Morgans estimates this would facilitate $140m per annum of PDL acquisitions.

Ord Minnett assesses some supportive features of the outlook are assisted by changes in the market structure. Supply conditions over the next 12-18 months are likely to improve in the US and competitive dynamics potentially change in the Australian PDL market. The stock has meaningfully re-rated over the past two months and, hence, the broker maintains a Hold rating with a $24.50 target.

Capital Options

Ord Minnett points out there is room to move with debt levels, while there are three divisions generating returns above the target rate where capital can be deployed through FY20, a good position relative to the company's major competitors in Australia.

Morgans agrees the organic growth outlook is enhanced by the options on the company's table amid upside potential from increased capital deployment. The timing of any acquisition is uncertain, while the broker assesses the company can increase its domestic PDL buying share into FY21.

The balance sheet of positions of listed peers are stretched and a large private competitor has experienced recent action from the ACCC which has potential to impact on its PDL purchases.

Canaccord Genuity agrees the upside case is supported by the latent capacity on the balance sheet and there are a number of assets potentially in play that could procure meaningful upgrades for the stock.

This could take pressure of domestic purchasing and/or build further scale in the US while accelerating consumer lending aspirations. Even if excess capital is not deployed, the broker assesses growth in earnings per share returns to double digits in FY21.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms