Credit Corp: Lending to lift FY24

Author name:: By Scott Murdoch
Job title:: Senior Analyst
Date posted:: 27 October 2022, 7:00 AM
Sectors Covered:: Diversified Financials, Professional Services

Credit Corp's (ASX:CCP) 1Q23 confirmed recent dynamics: subdued core AUS PDL supply; probable acceleration in USA PDL volumes; and solid AUS Lending book growth.
FY23 earnings guidance was maintained and PDL purchasing guidance tightened to the top-end of the A$240-260m range (A$240m already secured).
CCP faces an AUS PDL divisional earnings headwind from low ‘core’ supply over FY23/24, offset by the improving scale of the USA. FY23 has some earnings pressures, however we expect a solid FY24 uplift (led by Lending).
We expect investor uncertainty on how the evolving macro/consumer conditions will impact the business to continue to weigh on CCP’s share price near-term. However, on a med-term view, we expect CCP to be a beneficiary of weaker economic conditions – allowing for accelerated investment in the USA and opportunistic acquisitions. CCP has a strong track record of disciplined investment and balance sheet management; trading on ~13x PE we see long-term value.

1Q23 – recent trends continue

PDL purchasing: CCP has contracted A$240m of PDLs to-date (pcp (A$210m). Investment composition is ~A$50m ANZ; ~A$170m USA; and A$20m in AUS secondary market purchases. Supply conditions remain constrained in ANZ, with CCP noting (very) early signs of unsecured indebtedness starting to build.

CCP stated the “prospect of rapidly rising US PDL supply is increasing” given the strong growth in US consumer credit and ‘charge off’ rates starting to tick-up.

PDL collections: Group 1Q23 collections were down 3% on the pcp. 1Q23 ANZ collections of A$87m were down 7% on the pcp; and US collections of A$43m were up 4%. We note USA is in constant currency and therefore will have some additional benefit from the weaker AUDUSD.

USA headcount: Headcount growth has been achieved (518 FTE vs 384 FTE in June-22) via: diverting existing Philippine workforce onto the USA shift; introduction of a ‘virtual office’ training facility; and a small uptick in existing site headcount.

A further uplift to ~600 FTE is expected in Nov-22 with additional AUS staff diverted to the US shift. Total group headcount was +8.3% for the quarter, with growth headcount in Agency and Lending, and some ‘catch-up’ in operational support.

Lending: The gross book was up ~12% (from June-22) to ~A$280m (~A$250m Jun-22), with volume growth continuing on pre-Covid volumes (>+200%). CCP noted that Wallet Wizard is experiencing record cash loan demand with no relaxation in credit settings (arrears/losses below pre-Covid levels).

AUS PDL heading back to sustainable earnings is the headwind to growth %

Guidance maintained: NPAT A$90-97m (-6.4% to +0.8% pcp); PDL acquisitions A$240-260m (from A$220-240m); and net lending A$50-60m.

AUS vs USA PDL divisions: CCP faces an earnings headwind from lower ‘core’ AUS purchasing over FY21-23. We estimate divisional earnings could re-base by ~A$17m over FY23-25.

The USA expected growth will offset this (short-term) before contributing to ‘net’ growth for PDL’s med-term (sustaining >A$200m USA investment will add +A$30m incremental NPAT (vs the ~A$17m AUS headwind).

Lending volume growth a near-term drag: lending volumes are tracking ~35-40% ahead of the pcp. We estimate incremental provisioning of ~A$24m in FY23 (a drag on near-term earnings); however lower incremental volume growth in FY24 to deliver a significant divisional NPAT uplift.

Investment view

CCP is solid value (~13x vs ~16x avg PE), however sentiment may remain weak near-term (consumer facing business heading into uncertain economic conditions).

The USA opportunity provides a strong growth path med-term, with evidence the USA earnings profile will accelerate the catalyst for a re-rate.

Price catalysts and risks

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

Risks: structural industry change impacting supply (AUS); reputational risks; regulatory risks.

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