Credit Corp Group

In Credit Corp back like Brylcreem from 26 Mar 09 (No View – $0.89), former analyst Steve Johnson said ‘The $39m market capitalisation makes it too small for an official recommendation but, if you’re prepared to do your own work, it could be an interesting potential opportunity.’ Since then, Credit Corp’s share price has increased 835%. Between 2008 and 2012 earnings per share increased almost fivefold from 12 to 58 cents, the dividend increased from four cents to 29 cents and the company now trades on a price-to-earnings ratio of 13 and a 4.3% fully franked dividend yield.

The company’s recent results suggest the valuation isn’t demanding, but buying debt ledgers is a highly cyclical business prone to accident. As debts are collected and ledgers mature the company must buy new ledgers to keep earnings growing. As the business cycle changes so does the creditworthiness of borrowers. If management wants to keep earnings growing to earn bonuses, it’s often forced to pay more for each ledger as competition increases during the good times. The temptation is to overpay and overestimate the amount of collections (and underestimate bad debts), which are sensitive to the business cycle.

Chief executive Thomas Beregi should be commended for his stewardship, including paying off the company's debt, but we’re prepared to wait for a string of bad news before considering an upgrade due to the cyclicality of the industry. AVOID.