Credit Corp: Divisional balancing act

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

03 August 2022, 8:00 AM

Sectors Covered:

Diversified Financials, Professional Services

• Credit Corp's (ASX:CCP) headline FY22 NPAT of A$96.2m was in-line with forecast, however the provision release benefit was above expectations.
• Divisional full year growth included: AUD PDL’s +2%; USA +16%; Lending +26%.
• FY23 NPAT guidance of A$90-97m (-6.5% to +1% growth) came in ~7% below expectations. Subdued AUS PDL purchasing conditions is the main headwind.
• CCP is arguably fairly priced, trading in-line with its long-term multiple (~16x PE). We retain an Add recommendation based on the visibility of the USA growth opportunity; and the potential for upside earnings risk over time from effective/opportunistic capital deployment.

FY22 result +9.2% but aided by provision release

CCP reported FY22 underlying NPAT of A$96.2m, up 9.2% on the underlying pcp and in-line with expectations (MorgansE A$96.2m). Headline NPAT benefitted from a ~A$10m lending provision release, versus our expectation of ~A$5.5m. Adjusting for this, FY22 missed by ~4.5% based on slightly lower 2H22 cash collections. 

Divisional underlying NPAT composition was: AUS Debt collection +2% to A$55.0m; USA Debt collection +16% to A$20.6m; Lending +26% to A$20.6m. 

FY22 PDL purchasing of A$395m was higher than the guided A$355m range (extra USA purchasing), with USA purchasing of A$223m (A$79m pcp); Australia A$97m (A$67m pcp) and the A$75m Thorn acquisition (A$148m of acquisitions pcp).

The gross Lending book closed at A$251m (+36.4% on pcp and +25.5% hoh), beating guidance of ~A$230m (originations A$267m vs A$193m pcp).

CCP closed with A$98.9m net debt (up from A$1.1m net cash in 1H22).

Softer FY23 outlook – although two out of three divisions growing

FY23 guidance includes: NPAT A$90-97m (-6.4% to +0.8% pcp); PDL acquisitions A$220-260m; and net lending A$50-60m. The PDL contracted pipeline stands at A$180m (A$150m US; A$30m AUS), up 20% on pcp (A$150m). 

AUS PDL’s: The AUS outlook remains subdued, with no incremental volume improvement over 2H22 increasing the divisional earnings headwind in FY23/24. We estimate a ~A$7m NPAT headwind into FY23 (on ~A$80m purchasing) in the absence of any one-off opportunities. 

USA PDL’s: CCP enters FY23 having accelerated 2H22 purchasing, supporting growth (CCP expecting ~25% cash collections growth to ~A$210m; and NPAT +20% to ~A$25m). CCP has invested ahead of operational capacity and will look to steady purchasing until headcount is increased (an additional 100 FTE added on US collections from CCP’s existing Philippines office). Hiring conditions should improve in the US through FY23 and we see the potential for CCP to move back to +A$200m purchasing pa. 

Lending: CCP’s 25% gross lending book uplift over 2H22 assists solid earnings growth (pre provisions) in FY23, with management remaining confident in the credit quality of current volumes. Maintaining current origination strength will drag on FY23 NPAT given upfront provisioning.

~10% EPS downgrades across FY23/24

We downgrade FY23/24 EPS by ~10% Our FY23 NPAT forecast (A$98m) sits slightly above the top-end of guidance. At the divisional level, our assumptions lead to approx. NPAT moves of: AUS PDL’s -A$7m; USA PDL’s +5m; Lending +A$4m.

Primary swing factors in FY23 are:

1. Lending: the impact of upfront provisioning of the Lending book leads to lending volumes being a large swing factor (higher volumes will depress FY23 NPAT).
2. One-off acquisitions opp’s in AUS (upside).

Investment view: Add maintained

CCP’s near-term valuation is fair (16x FY23 PE), however we see the USA opportunity as providing visible growth on a med-term (3-yr) view. CCP’s balance sheet position provides optionality and upside earnings risk.

Price catalysts and risks

Capital deployment via large inventory purchase; USA PDL’s or acquisitions.

Structural industry change impacting supply (AUS); reputational risks; regulatory risks.

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