Credit Corp: Investment steps up, profitability to follow
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 02 February 2023, 8:00 AM
- Sectors Covered:
- Diversified Financials, Professional Services
- Credit Corp's (ASX:CCP) headline 1H23 Net profit after tax (NPAT) of A$31.8m (down 30% on pcp) missed expectations by ~26%. We anticipated a Lending provision drag, however the USA also missed.
- FY23 NPAT guidance was reaffirmed at A$90-97m, implying a 2H23 jump to ~A$58-65m. CCP expects Lending to deliver 2H23 NPAT of A$25-30m which covers the majority of the uplift to hit the bottom end of guidance.
- The building blocks are in place for CCP to return to delivering growth from FY24: profitability uplift from the increased loan book (in place); scale and improved operational effectiveness in the USA (execution required); partially offset by a rebasing of AUS earnings (ongoing as subdued volumes persist).
- Improved operational performance in the USA division is required through 2H23/FY24 for CCP to deliver on its expected medium-term growth profile. We expect management can execute on the strategy. On ~14x FY24F PE, our Add rating is maintained.
Event: 1H23 result misses across all divisions
CCP reported 1H23 NPAT of A$31.8m, down 30% on the pcp and ~26% below our expectations (at the bottom end of consensus). Divisional NPAT (vs pcp): AUS debt buying -26% to A$21.4m; USA debt buying -42% to A$6.1m; Lending -31% to A$4.3m. Versus our expectations, the USA performance was the largest miss.
Revenue was +8.2% on the pcp and only marginally (1.7%) below forecast. Total PDL cash collections were A$252m (-7.5% on the pcp) and Lending revenue was +55% to A$65.4m. Opex was elevated, a combination of: ramp up of operational headcount in the USA (low productivity); ramp up of Lending headcount (including ~A$2m of non-recurring project spend); and a ~A$2m drag from the CLH acquisition. Upfront provisioning from strong lending volumes (expected) also impacted, with an incremental A$15.5m of provision expense vs pcp.
Gross cashflow was down 19% to 165.4m (97.5% conversion) and investment was elevated: A$100m in net funding of consumer loans and A$188m in PDL purchases. The gross lending book closed at A$331m (+32% hoh) and net debt closed at A$267m (from A$99m) as a result.
Guidance maintained: implying a big 2H and a supportive run-rate into FY24
Guidance: CCP held NPAT guidance (A$90-97m), implying 2H23 NPAT of ~A$58- 65m. Net Lending and PDL purchasing guidance was increased.
Lending: CCP expects 2H23 NPAT of ~A$25-30m (from A$4.3m in 1H23), contributing ~A$23m (mid-point) of the incremental A$26m NPAT to meet guidance. 2H23 benefits from higher revenue (avg book +13%); lower provisioning (~A$12m); and lower opex with project costs ceasing and lower marketing.
USA: missed expectations, primarily from underperformance in cash collections (low productivity from FTE ramp up). CCP ended with 577 FTE (from 342 at June-22), with productivity (collections per hour) down 30% (cash collections flat in constant currency).
The payers book grew 17% on pcp; and the macro conditions look set to provide improved volume and price. CCP will lower 2H23 purchasing (~A$55m contracted in 2H23); stabilise headcount and focus on productivity.
AUS: low industry volumes continue to see a run-off of profitability in the division, with core purchases ~A$100m vs ~A$150m avg pre-Covid. In the absence of one-off purchases and/or improving volumes, divisional profitability would run down to ~A$30m (from ~A$40m FY23) into FY25.
Forecast and valuation update
EPS revisions: FY23 -3.9%; FY24 +3.1%; FY25 +2.9%.
Our FY23 NPAT forecast sits at the bottom end of guidance.
Execution in the US will be required for CCP to deliver on the expected FY24/25 growth step up.
We expect operational challenges can be rectified and the macro positions CCP to drive meaningful growth from the division medium term.
Price catalysts and risks
Upside: Capital deployment via large inventory purchase; USA PDLs or acquisitions.
Downside: USA execution; structural industry change impacting supply (AUS); reputational risk; regulatory risk.
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