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.

Investment view

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.

Add maintained.

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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