Why Pioneer Credit (ASX: PNC) is a High Growth Stock to Buy

This article was originally published at MF & Co. Asset Management.

Pioneer Credit Limited (ASX PNC) is a financial services provider, specialising in acquiring and servicing retail debt portfolios. The company has grown strongly in the past two years and there are no signs that this will slow. Outperforming the industry, PNC shares have a bright future ahead as it continues to grow.

About Pioneer Credit Limited (ASX PNC)

Pioneer Credit Limited (ASX PNC) acquires and services unsecured retail debt portfolios that are more than 180 days overdue in terms of repayments and defaulted by those who have no default history before.

According to their FY2015 financial report, the company acquired debt at around an 84 percent discount rate (paying 16 cents on the dollar).

Pioneer Credit Shares (ASX PNC) - PDL Historic Aggregate Portfolio Investments

PNC Has A Positive Corporate Culture and Strong Governance

Instead of collecting debt and without assisting the client to better their financial position, PNC has a reputation of helping debtors work through their financial difficulties and providing professional advice in an effort to rebuild the credit by referring the customer to Goldfield Money Limited (ASX: GMY).

Goldfield Money is a partner financial company that PNC has a 14% share interest in. By engaging with their customers and assisting them to rebuild their credit, PNC increases the chances they have of collecting the debt and create a long-term relationship with the customer to generate more revenue.

Other positive evidence to back up the positive governance and culture within the organisation is PNC’s management team, who have been helping the company experience rapid growth since long before the IPO in 2014. Historical performance reflects the team’s capability to maintain the growth and hit targets.

The remuneration package, which reflects strong corporate governance, is another indicator of the company’s culture and governance. PNC is now shifting from a focus on short-term incentives to long-term incentives.

In the FY14 report, it was reported that short-term incentive could be as high as 100% of management remuneration. In FY17, the company announced that there a higher focus towards long-term remuneration.

The focus on long-term incentives including shares and options could help the management team balance risk and allow them to focus on sustainable development of the company in the long-term.

From another perspective, the fixed salary of then Managing Director increased 54.7% from 300k to 464k per annum from FY14 to FY17. With an effective remuneration committee lead by a non-executive director, the salary rise awards the Managing Director for past achievements and is a vote of confidence for the MD going into the future.

PNC Shares Has Room To Grow and Is Expanding Its Business

The debt collection industry has an annual growth of 4.6% from FY13 to FY18. The industry is worth 1.2 billion in FY18.

Firms in the industry purchase bad debt from the original creditors at a discount on its face value. The main players in the industry include Credit Corp Group (ASX: CCP) and Collection House Group (ASX: CLH) with 16.4% and 12.6% market share respectively.

Pioneer Credit shares are third largest based on market share. From the main business activity PDL (Purchased Debt Ledger) perspective, PNC has the highest 17.66% revenue growth in FY17 while CCP and CLH recorded a 10.8% and 10.7% growth respectively.

What is worth mentioning is the excellent performance of CCP’s consumer lending division. The profit doubled to $12m in FY17 and expected to grow in FY18. The consumer lending business started in 2012 and has been growing steadily.

Pioneer Credit Shares (ASX PNC) Income and Expenditure

SOURCE:  Annual Report FY17: CCP

PNC together with its linked company Goldfields Money (ASX: GMY) is in the process of starting another similar business in the future. As their credit-impaired clients are not likely to get financing from other financial institutions, the customer base is quite loyal.

Additionally, a consumer-lending business successfully leverages PNC’s collections infrastructure, analytical capability and knowledge of credit-impaired consumers. The key to lending growth has been the ability to efficiently attract and retain new customers and existing customers. This is PNC’s opportunity for future growth within the industry.

Risks and Growth Potential for PNC

External factors including national unemployment, government debt and potential regulations will affect the overall performance of PNC and the industry. According to the Australian Bureau of Statistics, the unemployment rate is relatively stable which means Australians ability to repay debt will remain stable. A risk for PNC is if the unemployment rate was to increase, the ability of debtors to repay their outstanding debt may fall. This is one of the core risks to continued future profit growth.

Pioneer Credit Shares (ASX PNC) - ASB unemployment rate 2008 - 2018

 SOURCE: Unemployment rate: Australian Bureau of Statistics

Australian household debt will also affect the industry performance. High household debt, particularly for small personal loans, increases the scope for debt collection services to expand. As overall Australian household debt to GDP continues to grow, there is still room for the industry to grow with it.

Pioneer Credit Shares (ASX PNC) - household debt to gdp

SOURCE: Australia household debt to GDP: TradingEconomics

Regulations are heavy for this particular industry, and currently, the debt collection industry is under ASIC and ACCC regulation.

While potential future regulation change will influence the business, the heavy regulations will also create barriers to new entry.

PNC has a good reputation among clients and appears to have not been involved in unethical debt collecting processes. The company also owns Sphere Legal, which could provide legal advice for PNC and its clients.

Pioneer Credit Shares Growing Rapidly, NPAT +93%

PNC shares experienced four consecutive year’s growth in EPS and revenue since the company went public in 2014. There are no signs that this is slowing down, with FY18 half-yearly results showing an impressive +93% growth in NPAT and 57% growth in EPS.

Pioneer Credit Shares (ASX PNC) profit and loss

SOURCE: 1st Half of 2018 Results: PNC

Pioneer Credit Limited (ASX PNC) EPS EPS Growth Rate Revenue Revenue Growth Rate
2014 7.97 $25.6 million
2015 16.4 105.77% $39.1 million 52.31%
2016 20.8 22.44% $47.9 million 22.39%
2017 20.3 -0.25% $56.3 million 17.66%

SOURCE: Financial Report in FY2014-FY2017: PNC

Moreover, one of its major competitors Collection House Group (ASX: CLH)  experienced two consecutive years of decline in EPS and flat revenue growth. This can be considered good news for Pioneer Credit shares as it means PNC is taking their market share.

Collection House Group (ASX CLH) EPS EPS Growth Rate Revenue Revenue Growth Rate
2014 14.5 $107.3 million
2015 17.1 17.93% $126.0 million 17.43%
2016 13.9 -18.71% $132.7 million 5.28%
2017 12.6 -9.35% $133.4 million 0.55%

SOURCE: Financial Report in FY2014-FY2017: CLH

Pioneer Credit shares has a history of continually meeting or beating previous year projections, with profit after tax in 2016 forecasted at $8.8 million but achieved $13.7 million. Similarly, in 2017, profit after tax was forecasted to be $10.5 million yet achieved $15.27 million.

If Pioneer Credit shares was able to continue this trend of beating market expectations, we can expect FY18 results to be quite strong.

Projected Profit Actual Profit
2016 $8.8 million $13.7 million
2017 $10.5 million $15.27 million
2018 $16 million

SOURCE: PNC Financial Report FY2015-FY2017

Pioneer Credit shares is a Promising High Growth Financials Play

Overall, ASX PNC shares has potential to surge after three years of strong performance if they continue to grow at the rate they are now. Leading in corporate governance practices, high EPS growth and outperformance relative to the industry, we expect ASX PNC shares to have a bright future ahead.

Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced, having dealt with some of the wealthiest clients in Australia.

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