Credit Corp Outlook Could Prove Conservative

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Brokers suggest Credit Corp's full year guidance is achievable and growth estimates may even be conservative, given successful expansion in the US and acquisition of Baycorp.

-Earnings growth constrained in first half as the US business adds staff
-Potential upside from industry consolidation
-FY20 guidance could prove conservative
 

By Eva Brocklehurst

Credit Corp ((CCP)) expects gains in market share in Australian PDLs (purchased debt ledgers) will continue while the industry consolidates and operating issues are heightened for competitors.

The company produced a clean first half result, brokers assess, despite the impact of the acquisition of Australasian debt collector Baycorp, and has reaffirmed all guidance metrics. Net profit of $38.6m indicates full year guidance of $81-83m is very achievable.

Ord Minnett suspects growth estimates are conservative, given PDL acquisition guidance is $310-320m and earnings growth in the first half was clearly constrained as the US business added staff. Earnings per share were flat because of the dilution from a $140m capital raising, although the acquisition of Baycorp in August 2019 means these funds are being put to work, the broker points out.

Domestic cash collections were up 10% with modest productivity improvements. US collections were up nearly 60%, while staff numbers are set to grow a further 65% of the next 18 months as Credit Corp attempts to build market share.

The first half result was consistent with Macquarie's expectations, based on growth in US debt purchases through market share gains and improvement in asset turnover. The Australasian debt buying business is also stable and the broker envisages potential upside from industry consolidation.

Opportunities

Canaccord Genuity highlights the fact that patience at the top of the domestic debt purchasing cycle has presented management with opportunities for share gains and enhanced returns. Moreover, the offshore strategy has been executed successfully.

Despite flat conditions in the Australasian PDL market, FY20 guidance implies 15-18% growth in net profit and Baillieu considers this safe, given there will be a full period of inclusion of Baycorp and a strong profit trajectory in the US.

FY20 is expected to be a year when consumer lending business approaches hurdle returns and management appears to have been resourceful in deploying capital at a time when traditional business has become less attractive.

Nevertheless, Canaccord Genuity suspects that sentiment has pushed the earnings metrics into a market premium that is a little detached from cash flow forecasts. On the other hand, this is countered by a high degree of earnings certainty, flexibility on the balance sheet and potential for double-digit growth next year.

Canaccord Genuity, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $35.00 target. Valuation is Baillieu's only perceived barrier to a stronger view and any material weakness is considered a buying opportunity. The broker, also not one of the seven, retains a Hold rating with a $34.25 target.

Morgans remains positive about the stock too, believing there is a strong visible organic growth path. There is also further upside potential from capital deployment over the next 12 months. The broker retains a Hold rating on valuation, looking for additional upside, and assesses the company's track record of delivering on targeted returns is intact, while there is upside risk from further acquisitions and higher capital deployment.

The lending division continues to report solid growth with book growth of 13%. The company's automotive lending product remains in the pilot phase with the loss rate performance still being monitored and not performing as well as required at this stage.

The main areas which interest Morgans are the $298m of PDLs secured to date while the US cost to collect has increased to 43% because of the rapid increase in personnel. This is expected to reduce to 38% in the longer term.

Major Flow Returning

FY21 PDL purchasing should also benefit from the return of a major bank flow in the second half. The company has estimated this to be around $50m in total invested value and Morgans expects Credit Corp could potentially secure $30-40m. In this instance, FY20 guidance could prove conservative.

Canaccord Genuity observes the Baycorp acquisition has moved the composition of the profit & loss around, and lease accounting means some operating expenditure is now included in the depreciation and interest cost lines. Baycorp is on track to deliver $6m in net profit in FY20.

Ord Minnett expects the company will strategically deploy its financial headroom over the coming years into strong returning assets although, given the re-rating on the stock, much of the upside has been priced in. The broker remains confident in management's ability to execute on its strategy.

The database has one Buy (Macquarie) and two Hold ratings. The consensus target is $33.70, signalling -0.7% downside to the last share price.

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