CCP 3.75% $18.53 credit corp group limited

Ann: Credit Corp Group FY22 Results Presentation, page-27

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    1. Paycheck Protection Loan forgiveness

    The $4.5m Paycheck Protection Loan forgiveness arose because the US Government loan had a rider that partially or fully forgave repayment if the business kept employee counts and employee wages stable. CCP has removed $4.5 from its statutory net profit of $100.7m to report $96.2m, because the loan forgiveness was excluded from the guidance given.

    2. Overall view of FY22 as reported

    In respect to 2022, CCP bettered its initial guidance, and ended up eclipsing guidance on investment in both PDL and Loan Book investment, and coming in at the top end of its NPAT and EPS guidance, so there is nothing there to disappoint the market.

    What spooked the market was the low 2023 NPAT and EPS guidance, and the reason for this, insufficient collection capacity. Having insufficient collections staff to rake the money in is probably the most benign of problems, and it can be ameliorated via innovative recruitment and enabling technology. Also, if the prices paid for recent PDLs acquired in the USA factored in the problem, then the value is not lost, it just lags into later years. What is lost is the opportunity cost of not investing in PDLs, for H1FY2023, but that may well be ameliorated by what new investment happens over the full year, and when. Also, we only know what Management has stated, any sensitive matter now in the offing, is unknown (see Section 7)

    3. The 2023 Guidance

    CCP conservative, so its guidance is based on what Management knows for sure, not what Management expects. So if a forward flow agreement is expected, it is not included in the forecast until the agreement is made.

    -------------------FY2022 initial guidance -----,26 Apr 2022 -------- Actual
    PDL investment ----- $200 – $240m ----- $345 – $355m ----- $395.02m *
    Net lending --------------- $45 – $55m -------- $70 – $75m -------- $92.0m *
    NPAT ---------------------- $85 – $95m -------- $92 – $97m ------- $96.2m
    EPS (basic) --------------- 126 – 141cents ---- 137 – 144cents --- 142.2cents

    * Taken from cash flow: “Acquisition of purchased debt ledgers (394,999)” ;and “Net funding of consumer loans (92,004)”.

    I would take the following FY2023 initial guidance to be understated: There may well be a $20m increase in PDL investment range, and a small uplift to NPAT and EPS. CCP has a long history of improving its guidance during the year.

    PDL investment ------- $220 - $260m
    Net lending --------------- $50 - $60m
    NPAT ----------------------- $90 - $97m
    EPS -------------------------133 – 143cents

    4. 2023 PDL supply

    We know that there is a dearth of PDL supply in ANZ, and why. However, I am unsure why ANZ does not mirror the situation in the USA (according to CCP, Encore Capital and PRA), and in Europe (according to Intrum). The increases there are partly due to increased consumer borrowing, and partly due to diminished debt forbearance and moratoria.

    For now, I''' accept the $30m that CCP has “committed” in ANZ, and not expect that to grow by much, but grow it will. In the USA, CCP can buy as much debt as it can handle, but it invested and committed to forward flows, heavily in FY22 – beyond its ability to collect there, which is why it commenced its USA-focused shift (circa 100 FTE staff) in the Philippines.

    A pull-back from the FY22 investment level in USA PDLs should not be seen as a negative. Management has not forgotten that buying more than CCP could collect was what caused CCP's near collapse in FY2009. That said, I expect that at an apt point, CCP would decide to buy more PDLs in the USA, and change the guidance. It is just a question of establishing how the team in the Philippines pans out, how that team should be increased, and what other staffing and automation initiatives allow. The team in the Philippines was referred to as “experienced”, so many may be old hands deployed to now collect on USA PDLs. On Page 13 one reads, “ Philippines evening shift has commenced with ~100 FTE augmenting onshore resourcing”, and “ Potential to grow this component of the workforce”.

    5. 2023 Lending

    From a revenue perspective, lending business should do well in both ANZ and US, but up-front provisioning will negatively impact reported profit. That is an issue of accounting, rather than the underlying reality. CCP is only starting the USA lending business, and we know from the Australian experience that it took a few years for the lending business to be profitable.

    6. 2023 Profit and Financial Management

    If Management has an excuse to understate future performance, that is what it does, and then surprises to the upside. Expect this guidance to change for the better during the year. CCP's NPAT, is very robust for a few reasons – to wit:
    1. CCP's PDL profitability has a built-in heat sink. When it buys a large volume of PDLs, the collections teams focus on the easy pickings, so productivity and profits are good, but some of that profit is hidden by over amortisation (effective amortisation under the current accounting standard). When PDL supply is short, collectors focus on older debt, so productivity is lower, but because the residual value of the PDLs has been over amortised, the profit as a percentage of collections is higher. This has been amply demonstrated in the past dozen years.
    2. The teams that collect on PDLs can be deployed to collect on loans, and as is now happening, the Philippine's staff who are prepared to work night shift) can be switched to service the USA operation.
    3. Funding looking for a business-as-usual home can be invested in either PDLs or the Loan Book, and either in ANZ or the USA, and that includes opportunistic purchases of secondary PDLs. Then there are strategic deployment of funds in technology and new initiatives. In the US and Europe, the significant players like Encore and Intrum also view buying their own stock as a funds-deployment option.
    4. Conservative accounting is not limited to Point 1, it manifests itself in other way – over provisioning, for one, and that extends beyond up-front loan provisioning.
    7. Capital Management

    Capital Management covers routine investment in PDLs and the Loan Book, plus initiatives that are not routine. This section 7 is focused on what is not routine, and it extends Point 3 in the above Section 6. The capital management issue is raised because of a few points raised in the 2022 Annual report – specifically:
    • Lower anticipated investment in FY2023 will produce substantial free cash flow that will release funding lines to maximise opportunistic investment.
    • Record US investment and lending settled volumes resulted in net debt of $99 million at the end of FY2022, with undrawn funding lines of $212 million. Anticipated lower FY2023 investment is expected to result in significant free cash flow generation and to increased undrawn lines.
    • Credit Corp is in the process of extending its $100 million consumer lending warehouse and also enabling the financing of auto loans within the warehouse.
    In essence, CCP is going to have the leeway to hurl $100m at various things, which could include a third collections centre in the USA in a geography more conducive to hiring staff. This could be done organically, or by acquiring a staffed facility. It is the deployment of that $100m that inclines me to expect a better “guidance” later in FY23.

    8. Share Price

    I do not want to get into a debate about where the SP should be. I am prepared to value CCP higher than most investors, because I know it well, so I do not have to have a huge margin of safety. To a degree, the best rule-of-thumb valuation methodology for a steady-state dividend payer like CCP may be PER x EPS, and with CCP's long history of steady performance, I would not consider a PER lower than 15, which is average.

    EPS PER Share val
    142.2 -- 15 -------- 121.33
    --------- 16 -------- 22.75
    --------- 17 -------- 24.17
    --------- 18 -------- 25.60
    --------- 19 -------- 27.02
    -------- 20 -------- 28.44

    Take you pick.
    Last edited by Pioupiou: 03/08/22
 
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