A look at Credit Corp Group Limited’s prospects

A look at Credit Corp Group Limited’s prospects

If a picture is worth a thousand words, we thought that after a recent meeting with Credit Corp Group Limited’s (CCP) management, a timetable would be helpful in showing how we currently anticipate the next few years playing out for the company.

With the 2013 financial year almost over (just one month remains), our focus is now firmly on the next 12-24 months and what the future may bring. With this in mind, let’s add a little more colour to the below chart:

• Barring any unforeseen shocks, FY13’s outcome is largely known, given the recent May update.
• Following on from mid-teen NPAT growth rates in FY13, we anticipate that CCP will grow at similar or slightly lower levels in 2014. Management is heavily incentivised to grow NPAT by at least 11%, and we currently expect that this is achievable. We currently believe FY14 growth should be supported by record PDLs in FY13, coupled with more favourable accrual accounting treatment of the loan book’s profitability (it’s already appearing to be profitable from a cash perspective). We also expect the loan book to double in the coming 12-month period.
• FY14 we also see as a ‘transitional year’ for the business. After 18-24 months of getting their international growth strategy bedded down, July of FY14 could see their USA expansion plans green lighted and a new facility with a large collection capacity opened.
• The US expansion plan is very important, as this would become the business’ next source of growth. And the opportunity is large. Naturally, while we currently rate CCP management very highly, we are watching this development with interest – given the execution risk.
• Appearing to reduce this execution risk are some very large legislative tailwinds currently working in favour of CCP’s international expansion efforts (namely the recent passing of rules whereby PDLs cannot be resold).
• The US collections market is currently dominated by Managed Investment Schemes (MIS) and Private Equity players who are known to purchase books, squeeze them as quickly as possible (collect the easy money) to get their money back, and then flip the remaining books for a riskless profit. It’s estimated that 90% of the market participates in such activities. Under new legislation, this practice has been effectively stamped out. Sellers of PDLs (Citigroup, American Express, JP Morgan, Chase etc…) now have to ensure that books are being sold to reputable organisations that will manage their books and NOT resell. According to CCP, a large portion of the US collection market will be impacted by this structural change – the move to a collection service model – and this plays directly into CCP’s strengths, and opens a large opportunity for CCP to grab market share at just the right time – whilst other participants scramble to get their houses in order.
• We note that in FY13, CCP have enjoyed very favourable market conditions, with two large competitors being out of the market. We currently expect stronger levels of bidding competition in FY14, and hence their current market share could moderate from current record levels, impacting growth rates. We view a sustainable level of Purchased Debt Ledgers (PDLs) at $90m-$100m as more likely with upside from there if competitors fall over again. Keep in mind this would be down from the current forecast of $130m.

Thus the opportunity for CCP is potentially large, but like any business strategy or investment it’s not without its risks. One to watch.

Montgomery Investment Management owns shares in Credit Corp Group limited.