Thursday, July 12th, 2018
An interesting recent development for Credit Corp (CCP) was a negative research report on the stock, published anonymously. This thesis was publicly distributed through Twitter, seeking to establish that the value of Credit Corp is below the current stock price. Presumably, the author stands to benefit in some way from a fall in Credit Corp shares, although the identity and investment position of the author were not disclosed.
Credit Corp went into trading halt for one day, while the company prepared a response, then subsequently resumed trading. The stock is currently trading 2% below the price prior to the release of the short report. We used the opportunity presented by a short term fall in the price to add 0.2% to our position at a price of $17.46, 6% below the current price.
The recent Glaucus short report into Blue Sky Alternative Investments (BLA) precipitated a substantial decline in the BLA share price and has created a fearful environment. Some shareholders initially panicked and sold Credit Corp stock up to 20% below the prior closing price. However, the present report is differentiated by the lack of a track record of the author and by the weakness of the thesis. Investors quickly identified that the valuation methods lacked credibility, hence the quick recovery in the stock price.
The focus of the short thesis is Credit Corp’s consumer lending segment, which accounts for just under 20% of group earnings. The report argues that Credit Corp exploits a loophole in the definition of a payday lender, to avoid regulatory requirements and access cheaper bank funding – which is not available to payday lenders.
However, it would be more correct to say that payday lenders exploit a loophole in consumer credit protections to charge consumers fees and interest which typically amount to over 250% per annum. Credit Corp operates on the right side of the regulator, structuring products within the mainstream lending cap of 48% per annum i.e. providing a better alternative to consumers.
This area of consumer finance was subject to intense regulatory scrutiny three years ago. Several of Credit Corp’s competitors were fined and required to modify their business practices. Credit Corp’s lender, Westpac, undertook a detailed review at that time and decided to continue to fund Credit Corp’s consumer finance business. The short argument is really three years late.
It was further argued that Credit Corp may be manipulating its accounting, on the basis simply of low variation in several financial metrics in recent years. We note that Credit Corp’s accounting is more conservative than its listed peers and the company points to two large US operators, PRA Group and Encore Capital Group, who have also reported very consistent metrics in recent years.
Finally, the weakest part of the short report is the valuation of $10 per share. The authors have supported this with a DCF valuation, which is effectively a run-off valuation. It assumes Credit Corp stops buying debt ledgers (its core business) or lending to consumers from today.
We continue to hold Credit Corp across Clime portfolios, with incremental opportunistic buying following the short report. The business has a significant opportunity from expansion of its US debt collections business – which became profitable in 1H18. The company recently affirmed its FY18 earnings guidance, including 13% EPS growth at the mid-point of the range.