Australia | Aug 04 2021
This story features CREDIT CORP GROUP LIMITED. For more info SHARE ANALYSIS: CCP
Credit Corp is charting difficult territory amid disruptions from government stimulus and lender forbearance, yet expansion in the US provides an opportunity to increase debt purchases
-Excess liquidity will enable Credit Corp to capture share
-Capacity to earn is significantly improved amid large potential in the US
-Arrears on losses at historical lows but not expected to continue
By Eva Brocklehurst
Despite the volatile conditions created by the pandemic for the debt purchasing industry, Credit Corp ((CCP)) was able to deliver an FY21 result at the top end of guidance. Yet FY22 appears a little difficult to map out, as industry volumes are taking time to recover amid the disruption caused by government stimulus and forbearance measures taken by lenders.
Net profit guidance for FY22 of $85-95m appears conservative to Macquarie, reflecting the flow-on impact of the low volume in FY21 PDLs (purchased debt ledgers). Guidance is for $200-240m in PDL acquisitions, of which $140m is implied coming from the US. Net lending is guided at $45-55m.
While the short-term risks exist and volumes will be affected by the current lockdowns in Australia, Morgans believes the company can build a growth trajectory into FY23/24 and the long-term capacity to earn is significantly better based on the large potential in the US.
Ord Minnett agrees, noting that over the last five years the company has successfully allocated capital from parts of its business when the returns profile in Australian PDLs was under pressure from more capital entering the market.
Now, the market structure and competitor access to capital in Australia has materially changed, the broker points out, and this has strengthened Credit Corp's market position. Macquarie, too, notes the company has a competitive position in Australasian debt buying with the highest asset turnover and lowest cost to collect.
The committed PDL investment pipeline of $150m is split between $110m in the US and $40m in Australia, signalling a strong starting position for FY22. Brokers expect Credit Corp will be able to capture market share as volumes recover, given excess liquidity.
Ord Minnett had been concerned that an elongated period of limited supply and larger competitors would mean price inflation in the US market, with Credit Corp struggling to deploy capital, yet this dynamic does not appear to be playing out.
Credit Corp now has substantial investment capacity, with cash and undrawn lines of $372m, Macquarie adds, noting the company increased its US business capacity late in FY21 and reiterated an intention to reach $200m in annual US PDL investment.
Collections are modestly outperforming Macquarie's expectations with a focus on debt that is closer to statutory limits although this is unlikely to lead to a level where bonus payments will be triggered.
The company re-launched its automotive loan product in the June quarter and has noted encouraging early volumes. Meanwhile, arrears on losses remain at historical lows but Credit Corp does not expect this will continue and has made provisions accordingly.
FY21 underlying net profit of $88.1m was up 10.8%. A fully franked final dividend of $0.36 was declared, bringing the pay-out ratio to 55%. The FY21 result was supported by improved productivity in debt buying, and this came despite accelerated consumer lending and low forward flows in PDLs.
PDL acquisitions of $293m were below guidance of $310-330m and the face value of PDL debt declined to $8.5bn from $8.6bn with the number of accounts down -4.7%. The company obtained second-half gross lending volumes of $105m while provisions increased to 26.5% of gross loans.
FNArena's database has three Buy ratings for Credit Corp with a consensus target of $32.95 that signals 15.3% upside to the last share price.
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