Credit Corp: Opportunities likely to present through the year

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Analyst
Date posted:
21 July 2021, 10:00 AM
Sectors Covered:
Contractors/Developers, Diversified Financials

  • We expect Credit Corp (ASX:CCP) to report FY21 NPAT at the top-end of guidance (A$85-90m).
  • PDL supply remains subdued in both AUS and USA. We expect improvement through FY22, assisting the growth trajectory into FY23.
  • We note our FY22 earnings expectations are the lowest across analyst estimates. On this basis, we see CCP’s FY22 guidance has the potential to disappoint.
  • CCP’s balance sheet strength (+A$50m net cash) provides strong optionality.
  • We upgrade to an Add recommendation. Whilst potential short-term weakness (guidance lower vs consensus; heightened COVID-19 restriction impacts) may provide a better entry point, our upgrade is based on a longer-term fundamental view.

Event: FY21 result 3rd August

FY21 result expectations: we expect Credit Corp (ASX:CCP) to report a solid result vs guidance metrics: NPAT A$85-90m (est. A$89.6m); net lending A$10-20m (est. A$23.4m); and PDL purchasing A$310-330m (est. A$310m).

FY22 guidance may underwhelm: we forecast FY22 NPAT of A$95.8m (consensus range A$95.8-103.5m; average A$98.6m). Given subdued PDL supply conditions, we expect CCP to take a conservative position on FY22 guidance.

Analysis: Divisional outlook into FY22 and beyond

AUS PDL supply: Excluding the CLH book purchase, CCP will acquire ~A$85m of PDLs in FY21, well down on ~A$140m average over FY18-20. Consumer credit balances have been depleted (see overleaf), which will take time to rebuild.

We expect the low point has passed and supply will start to increase from: inventory sales commencing post moratoriums lifting; steady recovery in consumer revolving credit (and defaults); and the potential for larger transactions or the return of a major seller.

USA PDL supply: US debts sales are also ~45-50% below pre COVID-19 levels, with major US buyers expecting a rebound in early CY22. We expect CCP to be able to step-up USA purchasing given their low market share and available capital.

Lending: As at 3Q21, CCP’s lending volumes were ~10% below pre COVID-19 levels with the gross book ~23% below. We expect volumes have continued to rebound (close to 100% of pre COVID-19 levels) and expect the lending book to rebound to ~A$198m in FY22 (up 17% on 1H21). Executing on product expansion (auto lending) is required to drive medium-term divisional growth.

Capital capability: We forecast closing FY21 net cash of A$54m, with ~A$312m of undrawn debt capacity. Any uplift in capital deployment (additional supply; book acquisitions; corporate acquisitions) will be highly accretive.

Forecast and valuation update

We make no changes to forecasts or valuation (DCF/PE valuation of A$33.45ps). We note our FY22 forecasts are ~3% below the consensus average.

FY22 assumptions include: PDL purchasing A$230m and the FY22 closing lending book A$198m, up ~8%.

Investment view: Upgrade to Add recommendation

Upgrade to Add recommendation.

Short term, we note that guidance may underwhelm and extended AUS COVID-19 lock-downs may see heightened share price volatility.

Our upgrade is based on a medium-term view, with the group having visible growth drivers: we expect AUS PDL supply to improve over FY22/23 and see the potential for larger transactions to add to purchasing; we expect CCP to capitalise on the market share opportunity in the USA; and a rebound in consumer lending. 

Price catalysts

CCP result 3 rd August, 2021.

Capital deployment via large inventory purchase or acquisitions.

Risks

FY22 guidance below consensus average may result in short-term weakness.

Extended COVID-19 related lock-downs, causing debt sale/collection moratoriums. Structural industry change impacting supply; reputational risks; regulatory risks. 

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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