Recently Credit Corp Group (CCP) suffered a ~20% share price plunge in the wake of a short thesis being published on the online forum ”Hot Copper.” Since then the share price has now recovered and is trading at the same levels it was previously. During this lull we had a quick look to see if this was an opportunity to acquire shares at a prominent discount. We think CCP may present a solid investment due to its high growth consumer loan business, consistent growth in dividends and earnings over ten years, good management, and geographical diversification (across Australia, New Zealand, and the United States).
CCP is a consumer finance company which primarily acts as a debt collector; purchasing consumer and small business debt from Australian, New Zealand, and US banks, telecommunications, utilities, and financing groups. CCP’s business can be viewed through three segments.
The largest segment, comprising of around two-thirds of the company, is its debt collection business.CCP operates by purchasing ledgers of overdue debt from institutions (mainly banks) at attractive prices. On average they pay around 20c on the dollar face value of the underlying debt and collect around 60c. This business is the largest in its home market, Australia, comprising around 40$ market share. It is also one of the most disciplined, with a reputation for being cautious, having a consistent track-record of efficient purchasing and collection. The company has a history of reeling back during times of elated pricing and having the share price punished for this by the market. Such practices, however, show a desired management trait in this industry: restraint.
The second largest business, accounting for around 25% of the company, is the group’s consumer loans business. The Group has constructed a product to fill the need for credit from consumers who cannot get it from banks for various reasons (including regulation) but whose demand also isn’t covered by payday lending. The product appears to be the cheapest available in Australia at present and has both regulatory approval and funding from Westpac. Of interest in this segment is the company’s conservative presentation of results in this segment, a symptom of its cautious management style. The company takes the full loss expected on average across the book of any loan given, even ones with more than a year’s duration. This is important to observe as it means that when this segment grows faster its reported profitability is lower even though the underlying profitability is improving. Most market investors would not take this into account resulting in a systemic discount.
Payday lending in USA
The remaining business is the focus on existing company know-how on entering the payday lending industry in the USA. Here again the group books all their losses with this new business segment and shows significant discipline in its approach. When pricing was elated the group showed restraint despite the desire to report impressive growth in a new business segment. With the recent rejuvenation in the US economy, payday-lending book prices have dropped and CCP has been taking full advantage of this. Admittedly this business segment faces the obstacle of requiring a sharp increase in the number of trained collectors in a market with established players but the US is a very large growth market, ten times that of Australia. While CCP is one of the smallest players there at the moment they are growing fast and have a lot of track to run on. We would expect them to keep increasing market share at a significant rate in the near to medium term.
Assessment and Concluding Remarks
CCP is a disciplined company which generates high return ratios despite very conservative accounting practices. The core debt collection business has demonstrated a resilience historically with notable stability through different economic cycles underpinned by the company’s cautionary approach and that it serves a segment of the population which will always spend more than it earns with consistent demand for debt collection.
Through having economies of scale CCP is able to utilise its massive data library to undertake analytics into predicting reasonable purchase prices and assessing book quality. This is a significant advantage in its core market, where it is the largest player that competitors with smaller customer pools are not able to do.
We would note that the CEO, Thomas Beregi, started in 2008 right after the GFC when the industry was in disarray. Since then he has grown the company consistently and at an impressive rate while always setting conservative targets and beating expectations.
We think CCP presents a sound investment and the recent lull was a perfect opportunity to enter at a significant discount. At present, there is little clear upside to be had, with a P/E of 16% in line with consumer finance peers, but given the company’s resilience and future prospects, we wouldn’t be looking for a large drop from this point to increase a position.