Credit Corp: Further capital deployment is the upside

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
02 February 2021, 5:00 PM
Sectors Covered:
Diversified Financials, Professional Services

  • Credit Corp (ASX:CCP) delivered 1H21 NPAT of A$42.3m, up 9.5% on the pcp. EPS (down 11%) was diluted by the April-20 equity raise.
  • FY21 NPAT guidance was upgraded by ~6% (top-end) to A$85-90m. PDL investment conditions remain subdued in AUS/NZ, however the timely CLH acquisition assists growth in 2H21/FY22.
  • FY22/23 earnings sensitivity revolves largely on CCP’s ability to ramp up PDL investment in the USA. Increased capital deployment or acquisitions are the upside risks to earnings expectations given CCP’s strong capital position.
  • We remain positive on CCP’s long-term outlook given its balance sheet strength (net cash); a solid market position in both AUS/USA; and a material growth opportunity in the USA. We recently moved to a Hold, looking for more upside to our price target at this point.

Strong headline 1H21 result

CCP reported 1H21 NPAT of A$42.3m, up 9.5% on the pcp and ~7% ahead of our expectations. EPS was down 10.6% given the Apr-20 equity raise.

An interim dividend of 36cps (flat on pcp) was declared. Divisional composition included: AUS debt buying EBITDA +2.6% to A$47.4m; USA debt buying EBITDA +148% to A$11.7m; Lending EBITDA down 30% to A$9.6m.

PDL cash collections increased 5.6%, which was driven by the USA (+36% to A$70m) and AUS/NZ collections down 1% to A$180m. On a quarterly basis, USA collections remained relatively constant over the half (1Q A$36m; 2Q A$34m), whilst AUS/NZ fell 20% (1Q A$100m; 2Q A$80m).

CCP invested ~A$200m in PDL’s, which included ~A$145m for CLH; ~A$30m in AUS/NZ; and ~A$25m in the US. The gross Lending book closed at A$168m, down from A$181m at June-20, however recovering from the Sept-20 low of A$153m.

CCP ended the period with A$16m net cash.

CLH book acquisition fills the gap until the USA returns

CCP expects PDL investment of A$310-330m in FY21, implying ~A$160-180m investment excluding the CLH book (comprised ~A$95m AUS/NZ; ~A$75m USA).

The secured pipeline (as at Feb-21) is A$303m, of which A$72m is secured in the USA. Core buying volumes in both AUS and USA are relatively subdued on the back of a decline in overall market volume, however are expected to recover as loan forbearance measures are withdrawn.

The acquisition of the CLH PDL book has been very timely, adding ~A$200m (face value) to the arrangement book (+15%) and ~A$900m to total face value (+12%). CCP gave original guidance for the acquisition to add ~A$10m to NPAT in 2H21 and we expect an FY22 contribution of ~A$15m.

Guidance upgraded; Capital deployment creates the upside risk

CCP upgraded all guidance metrics, including: NPAT A$85-90m (from A$70-85m); PDL acquisitions A$310-330m (from A$270-330m); and net lending A$5-10m (from -A$5m5m).

CCP stated they expect Lending revenue and NPAT to return to growth in 2H21. CCP’s capital position and cash flow generation remains a strong competitive advantage and provides upside risk to medium-term earnings expectations.

Hold maintained, but looking for a pull-back

We retain a Hold based on valuation (~21x FY22F PE), but remain positive on CCP’s longer-term growth prospects. Further acquisitions and an acceleration of USA investment provide upside risk, especially given CCP’s balance sheet strength.

Downside risks remain around the broader economic conditions (recovery trajectory); and the availability of adequate PDL investment opportunities.

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