Company Update: Credit Corp

Thursday, May 2nd, 2019

Credit Corp is currently undertaking a share purchase plan (SPP), which was announced on 1 April 2019 together with a $125 million placement. The SPP is priced at the lower of $20.45 and a 2.5% discount to the volume weighted average price in the five days leading up to the SPP closing on 3 May. The shares are currently trading at $23.46, a 15% premium to the SPP price, making this a very attractive offer for existing shareholders. Shareholders as at 29 March 2019 are able to purchase up to $15,000 worth of shares at the SPP price. The offer is now open and application monies must be received by the share registry by 5pm on 3 May.

Together with the capital raising, Credit Corp affirmed FY2019 earnings guidance and provided positive commentary on the environment for purchasing debt ledgers in both Australia and the US. The positive commentary and the additional capital provided by the equity raising should support a significant increase in purchasing in FY2020 and consequent medium term uplift in group earnings per share, notwithstanding a 13% increase in shares on issue.

The US debt ledger business represents a significant opportunity, accounting for only 8% of 1H19 NPAT but growing strongly off a low base. Management is targeting $40m+ NPAT from the US business by FY2023, matching the earnings of the AU/NZ debt purchasing business. The US business is already achieving productivity metrics in line with local competitors and CCP has been added to the panels of major sellers in this market.

The key impediment to ramping up business in the US has been hiring the workforce to process collections, given a tight labour market. The US headcount was increased only marginally over calendar 2018. However, the company updated the market on 1 April 2019 that there has been a significant acceleration in hiring with the business on track to reach site capacity of 430 staff by 30 September 2019, as illustrated below. This will represent growth of over 80% in the US headcount compared to December 2018.

 


Figure 1. Credit Corp’s US employee headcount
Source: CCP 1H19 result presentation

 

CCP management also commented that pricing and supply continues to be favourable in the US. One large credit issuer who has not been selling debt ledgers for the past five years is planning to resume selling this calendar year, representing a significant expansion in total market volume. Compliance remains a key barrier to entry and CCP noted that they were the first new buyer added to one large seller’s panel in the past six years.

In relation to Australia/New Zealand, CCP purchasing in these markets has reduced since FY17 given aggressive competitor buying. However, management notes early signs that competitors may need to pull back, commenting that “we are seeing some stress in competitors, exacerbated by debt market exhaustion”.

In line with this commentary, the accounting practices of competitor Pioneer Credit (ASX code: PNC) have been questioned by their auditor and the regulator. The regulator is calling on sellers to increase their due diligence of debt buyers and large sellers have been requesting additional data from some of CCP’s competitors. In the past, CCP has purchased large ledger books from distressed competitors and it is not inconceivable that this could recur if bank support of a competitor reduces.

 

Clime Group owns shares in CCP.

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