Solid Outlook Prevails For Credit Corp

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Brokers flag a solid outlook for debt purchaser and consumer lending business, Credit Corp.

-Record level of debt purchasing in the first half
-Loss of market share considered only minor
-Double-digit earnings growth expected over FY18-19
 

By Eva Brocklehurst

Debt ledger purchaser and consumer lending business Credit Corp ((CCP)) has proved its consistency in the first half. Growth divisions are on track, consumer lending should hit pro-forma returns and the US division is expected to become profitable in the second half.

The company has confirmed FY17 earnings guidance for profit of $53-55m, which would represent 15-20% growth on FY16. Forward flow tenders awarded late in FY16 and the secondary market purchase of NCML's ledger book underpinned a record level of debt purchasing (PDL) in the first half.

Canaccord Genuity suggests investors may have been confused by commentary that signalled market share losses occurred, relating to the unsuccessful renewal of some forward flows. While pricing has improved on some of the larger forward flows, where capital requirements limit competition, some of the smaller business has been aggressively bid away by peers, the broker suspects.

This raises one of the questions frequently put to the broker, as to whether the company is close to reaching a ceiling in terms of market share. The loss of some market share in the half year is suspected to be unfairly interpreted as proof that this is the case. The broker asserts that losing out on a handful of small tenders, as others have opted to bid more than the most efficient operator in the market is prepared to pay, should be a comfort to investors.

Earnings guidance has been maintained, while the company's purchasing for the year is locked in, and there should be limited downside to the full-year result. The broker suggests, if competitors over-reach on price, there will be a benefit from reduced purchasing competition and returns should improve going forward.

Pricing Discipline Maintained

Hence, the company's willingness to maintain pricing discipline in recent weeks should mean free cash flow is generated over the next six months, leaving it well placed to capitalise on pricing improvements and any fall-out in the industry. The broker, not one of the eight monitored daily on the FNArena database, has a Buy rating and $19.23 target.

Adjusted operating earnings growth of 15.2% was in line with Morgans' forecast, driven by 13.5% growth in cash collections, lending interest revenue, and a slight improvement in the operating margin, to 58.5%.

A second half earnings uplift is expected to be driven by the lending division, which will benefit from seasonally lower volumes and lower planned marketing expenditure. Morgans also expects a meaningful uplift in cash collections, which provides confidence the company is tracking towards the top end of guidance.

Morgans expects solid double-digit organic earnings growth over FY18-19. While stock is trading at the top end of its longer term price/earnings ratio, at around 14.8, the broker believes the premium can be sustained, because of the growth profile and track record. Morgans retains an Add rating and $19.90 target.

Profit Guidance Easily Attainable

Ord Minnett retains an Accumulate rating on the stock, with an $18 target. The broker expects profit guidance to be relatively easily attained, given the committed pipeline of PDL acquisitions, the increased head count and a seasonal pause in consumer lending growth. While gearing is elevated, at its highest level since FY09, management has highlighted a significant increase in operating cash flow is expected in the second half.

To fund the medium-term growth aspirations, management has signalled it is actively exploring extending existing finance arrangements as well as asset-backed financing options. Ord Minnett remains cautious on the outlook for the US business, but expects further regulatory clarity over the next six months. Moreover, the upside remains a relatively cheap option for shareholders, in the broker's opinion.
 

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