Pioneer Credit (ASX: PNC) Is A Leader In Debt Collection

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

Today we’ll look at why Pioneer Credit (ASX PNC) is a great stock to buy.

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 four 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.

Pioneer Credit is also one of our top dividend stocks to buy for 2019top small cap to buy and best share to buy for 2019.

About Pioneer Credit Limited (ASX PNC)

Pioneer Credit Limited (ASX PNC) acquires and services unsecured retail debt portfolios.

PNC acquires debt that are more than 180 days overdue in terms of repayments and defaulted by those who have no default history before.

The company acquires debt at around an 84 per cent discount rate (paying 16 cents on the dollar).

Pioneer Credit Surges 28% on Takeover Talks

There was some extremely positive news today for Pioneer Credit.

The Pioneer Credit share price rallied 27.92% today to close at $2.52, which was good news as the stock had been under pressure.

Following an article in the financial review this morning, the companies share entered a trading halt.

PNC then released an announcement with three main points

  1. The company has received several confidential, non-binding, indicative proposals.
  2. The most comprehensive proposal, by way of a “scheme of arrangement” will be at a material premium to the current share price
  3. Discussions concerning the proposals are ongoing

This is a very strong positive signal for Pioneer Credit shares.

At this point in time, we are positive on Pioneer Credit and will wait for more news as this develops.

Sell-Off in Pioneer Credit Shares Overdone

The fall in the companies share price started in February when the company released its half-year results.

In the results, the auditor PWC issued a qualification saying they where unsure how to value the Personal Debt Portfolio (PDP) on the balance sheet.

Currently, PNC values the PDP on its balance sheet at fair value instead of the industry standard of amortising PDP cost over time.

PNC in a conference call on the 9th April addressed the market’s concerns by saying that under both accounting methods, the end result for cash flow and profitability would be the same.

This is important because from our point of view the current value of the debt portfolios is not as important as the cash flow and profit the PDP generate over time.

Considering there was no change in cash flow and profitability, the sell-off after the announcement looked overdone.

PNC Has A Positive Corporate Culture and Strong Governance

Instead of collecting debt without assisting the client to better their financial position, PNC has a reputation of helping debtors work through their financial difficulties.

They do this by 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.

This also creates 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.

The team helped the company grow rapidly since long before the IPO in 2014.

Leslie Crockett (CFO), Sue Symmons (General Counsel & Company Secretary), Keith John (MD), Lisa Stedman (COO)

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.

It is also 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 rate 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 revenue perspective, PNC has the highest at 9.40% revenue growth in 1h19.

Competitors CCP and CLH recorded 8% and 4% growth respectively.

PNC Looking To Start a Consumer Lending Business

What is worth mentioning is the excellent performance of CCP’s consumer lending division.

Revenue grew 20% from $37.5m in 1H18 to $44.3m in 1H19. The consumer lending business started in 2012 and has been growing steadily.

SOURCE:  Half Year Report FY19: 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.

 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.

SOURCE: Australia household debt to GDP: TradingEconomics

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

While potential future regulation change will influence the business, 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.

Strong EPS Growth in FY18

PNC shares experienced four consecutive year’s growth in EPS and revenue since the company went public in 2014.

On a full year basis, Pioneer Credit experienced strong EPS growth in FY18.

Even though EPS growth was weak in FY17, PNC came back with a vengeance.

FY18 saw EPS growth of 36.55% and revenue growth of 43.33%.

FY EPS EPS Growth Rate Revenue Revenue Growth Rate
2014 7.97 $25.6m
2015 16.4 105.77% $39.1m 52.31%
2016 20.8 22.44% $47.9m 22.39%
2017 20.3 -0.25% $56.3m 17.66%
2018 27.72 36.55% $80.7m 43.33%

SOURCE: Financial Report in FY2014-FY2018: PNC

FY18 half-yearly results showing an impressive +93% growth in NPAT and 57% growth in EPS.

However, FY19 half-yearly results showed NPAT fell 33%, down from $8.1m to $5.5m.

Since we are only halfway through the financial year, it remains to be seen how PNC will round out the year.

Pioneer Credit shares have a history of continually meeting or beating previous year projections.

Profit after tax in 2016 was 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 is able to continue this trend of beating market expectations, we can expect FY19 final year results to be quite strong.

Pioneer Credit shares is a Promising High Growth Financials Play

Overall, ASX PNC shares have the potential to surge after four 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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