Credit Corp Primed For Lending Rebound

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Benefitting from a well-timed acquisition, Credit Corp has managed to allay fears regarding the pandemic-induced slump in lending volumes

-Competition in Australasian PDL acquisition constrained
-Key opportunity lies in the US
-Buying volumes expected to recover over FY21
 

By Eva Brocklehurst

A smart purchase of a debt book has put Credit Corp ((CCP)) in a comfortably strong position in 2021 and lending volumes are also expected to recover as payment holidays, resulting from the pandemic, are wound back.

First half net profit was $42.3m, up 9.5%, and the total debt buying portfolio increased to $8.6bn in December. The results were helped by lower-than-expected amortisation charges. Credit Corp has raised the range of expected PDL (purchased debt ledger) investment to $310-330m for FY21 and $303m of the purchasing pipeline was contracted as of December.

Cash collections from the Australasian PDL book fell -20% in the first half which was the primary driver of an earnings decline in the absence of book acquisition. Revenue softened -1.6% as consumer lending dropped -25.3%.

This was the main disappointment for Macquarie, although volumes are observed to be recovering now pandemic-related forbearance is easing. Lending revenue and net profit are expected to return to growth in the second half.

The US division, in contrast, provided a strong lift in net profit, with cash collections up 36%. Morgans is positive about the longer term prospects for the business and anticipates upside risk from further acquisitions and an acceleration of US investment.

The company has indicated it has the infrastructure to invest $200m per annum and, based on sustainably investing this amount in the US, Morgans calculates this would add around $32m in incremental net profit, or an increase of 35% off the current earnings base.

Moreover, longer term investment in the US has the potential to be materially above $200m and Credit Corp has ample capacity to scale up quickly if volume becomes available.

Ord Minnett points out over the past five years the company has been successful in allocating capital to various parts of the business as the return profile of Australian PDLs came under pressure from more capital entering the market.

The competitive position and potential in the Australasian consumer lending segment is significant as Macquarie notes, in this regard, Credit Corp has the highest asset turnover and lowest cost to collect, while the competition is either constrained by capital or compliance.

Furthermore, there are no adverse compliance orders or undertakings and a low dispute rate. Still, the broker agrees the main opportunity lies in the US where the company has become a very competitive buyer. Credit Corp has relationships with 75% of the sellers in the US market.

Collection House

Ord Minnett describes the acquisition of the Collection House ((CLH)) PDL book in December as, "impeccably timed" given the lack of supply in the market and a soggy consumer lending business in which volumes are only just starting to re-emerge.

The acquisition has provided an earnings bridge for the next 12 months while crucially allowing Credit Corp to retain personnel. Morgans agrees the acquisition was timely, adding $200m to the arrangement book and around $900m to total face value. The broker expects the Collection House book to contribute significantly out to FY23 and then tail off over the next four years.

Uncertainties

The uncertainties centre around broader economic conditions and general availability of PDL investment opportunities. Buying volumes in both Australia and the US are relatively subdued amid a decline in overall market volume but are expected to recover as loan forbearance measures are withdrawn.

FNArena's database has one Buy and two Hold ratings. The consensus target is $33.45, suggesting -1.6% downside to the last share price.

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