Credit Corp: Result 2014

Australia’s largest debt collector, Credit Corp, announced a solid full-year result with revenue increasing 26% to $174m, primarily due to strong growth in its newly formed small loans business. Net profit increased 16% to $35m and earnings per share was also up 16% to 75.4 cents. The board declared a fully franked final dividend of 20 cents (ex date 24 Sep), bringing the yearly total to 40 cents, up 8%, for a current yield of 4.3%.

Credit Corp’s core business of purchasing ledgers of distressed debt from banks and utilities performed admirably, given difficult industry conditions, with purchases reaching $145m, a slight increase on the previous year.

Competition for debt ledgers has been increasing recently from the likes of Collection House and newly listed Pioneer Credit, causing prices for ledgers to rise (see Credit Corp: Interim result 2014 on 13 Jan 14 (Hold – $9.26)).

Debt collection is somewhat like the insurance business – it’s very easy to grow revenue in the short term by lowering standards, but the long-term winner is determined by a willingness to let go of business rather than chase diminishing returns. So we’re pleased to see Credit Corp’s debt buying slowed markedly in the second-half to $59m, down 32%, while profitability and collections actually increased slightly.

This result reinforces our view that chief executive Thomas Beregi only buys ledgers that add value, and this discipline is why the company accounts for roughly 15% of industry revenue, but takes nearly half of industry profits.

Credit Corp’s recent foray into small short-term direct loans to people with poor credit histories accelerated in its second year, with total loans increasing to $63m from $19m a year earlier and offsetting the decline in ledger volumes. Though the division is only breaking even, management expect it to be profitable from 2015 onwards. Although it’s a different business model, we think direct lending has a lot of potential as the target customers are exactly those Credit Corp know best. If you want to go into the lending business, being the nation's best debt collector can't be a bad thing.

Great recession

A key source of growth for the company will be any further increases in unemployment – which hit a ten year high of 6.4% in July.  Financial hardship increases the need for people to get short-term bridging loans. It also increases the supply of debt ledgers, leading to favourable pricing and more opportunities.

The flip side is that unemployment makes collections more difficult. The real test will be whether an increasing supply of ledgers, and lower acquisition costs, offsets the greater number of defaulting loans. We don’t know the answer, which is why we have a high risk rating on the stock, though, with a history of managerial discipline and analytical strength, we expect the company to be a net beneficiary of recession.

The company’s small US ledger buying operations are performing in-line with management’s expectations. However, regulatory changes have reduced the supply of debt ledgers, causing prices to rise some 50% this year. Management has reduced staff numbers and is biding its time until supply increases, but believes the US ‘remains a strategic opportunity with significant potential’.   

Management provided profit guidance of 78-83 cents for 2015, with dividends in the 39-42 cents range. Credit Corp’s stock is flat since 13 Jan 14 (Hold – $9.26), putting it on a forward price-earnings ratio of 11, and dividend yield of 4.3%. It doesn’t look expensive but we’re happy to wait for a larger margin of safety before buying in. HOLD.