CCP - Credit Corp Group

[pixel]

They must be doing something right: from $3.70 to $10.70 in less than 2 years.



After the last retracement, they're now back to where they traded early this year.
Will this be support for the next leg up? If it is, I'd like to get some as well.

 

[Hodgie]

I had been looking to enter this company the last few months, the price decline over the last 2 weeks offered a good opportunity to begin to accumulate.

 

[VSntchr]

Looks like the recent update by CCP was foreseen by the market with the price coming down from ~$11 down to mid $9's and hovering around this area.

After reading all the information and taking some time to fully digest it - I have come to the conclusion that my faith in management continues to strengthen. Unlike some other boards which have been extremely misleading of late (which I have unfortunately been involved in: CIX, CDA etc) I am of the opinion that the leaders of CCP remain very conservative in their approach to informing the market. The market appears to dislike the fact that despite the increases in PDL's, the NPAT guidance has not increased and the outlook for further PDL's appears grim in the near future. Combine this with a delay in the growth of the US expansion and many investors have reason to dull their expectations for the companies growth prospects.

However, as a long term holder I am more interested in how management is dealing with the situation. I think their careful approach and long term view will ensure that the owners of CCP will reap the benefits once the cycle begins to turn.
Competition has been fierce for the last 2 years, yet CCP has still been performing ahead of their own expectations all the while they are planting seeds for the future with the low-risk approach to overseas expansion by utilising FCF and restricting heavy investment until performance is proven.

I continue to hold as a core stock in my portfolio.

 

[ROE]

+1

Lending will play an important role down the track but it will takes time.

I think CCP will price risk way better than anyone else as they has everything about their customers on file
customer credit history and repayment ability, how often they can make payment etc...

 

[tinhat]

I've never owned this stock before but I bought today at 9.01. Had an order at that price in for a couple of weeks now. Happy to catch a falling knife and dollar cost average in.

 

[ENP]

Has been hovering around the $9 mark for some time now.

Will be interesting what the late Jan/early Feb trading announcement brings.

I recently bought more at $8.60 in December. EPS growth of 15-20% plus and high ROE when the company was valued at only 12-13 P/E was a good reason to top up my holdings. I originally bought at $6.00 almost 2 years ago.

 

[pixel]

Has been hovering around the $9 mark for some time now.

Will be interesting what the late Jan/early Feb trading announcement brings.

I recently bought more at $8.60 in December. EPS growth of 15-20% plus and high ROE when the company was valued at only 12-13 P/E was a good reason to top up my holdings. I originally bought at $6.00 almost 2 years ago.

Lower Highs, Lower Lows... I don't hold at this time.
I'd set an alert at the 0% level, let's say $8.20; another one at $9.70 to catch the recovery case.

 

[ROE]

Good set of result out, 20c dividend
Steady as she goes in choppy market.

Revise profit up ... I like

 

[VSntchr]

Good set of result out, 20c dividend
Steady as she goes in choppy market.

Revise profit up ... I like

I liked this result too.

Looks like they have started to take on debt again - this will have to be watched closely.

US operations don't look satisfactory at present but if we are to believe management (and thus far they have been conservative in all communications over the last 4 years), they will likely be in a strong position within 1 - 2 years when smaller PDL buyers are forced out and PDL sellers re-enter the market.

Another area of concern (other than the re-introduction of debt), is that have now started to pay more for PDL's in return for the ability to collect on them quicker. I will have to take the magnifying glass over the report to try and see if this is purely because of operational efficiency improvements or if it is due to the company purchasing debt from telecommunication providers and other less profitable, but quicker to recover sectors.

They are clearly in a period of substantial investment with the US operations, the lending operations and substantial PDL purchases....yet earnings continue to increase, this is very pleasing.

 

[ROE]

Pleasing is their lending division start generating profit soon so another avenue for more profit grow,

this lending market is just as big as the debt market and they don't fall into the category of CCV and face scrutiny by governments and social workers.

 

[craft]

yet earnings continue to increase, this is very pleasing.

Earnings are a residual accounting number after the amortisation of the PDL’s.

The earnings figure are correct only too the extent the written down values of the PDL’s is correct.

Is the PDL valuation on the balance sheet correct? How do you know?

Just playing devil’s advocate – I too like CCP but don’t own at the moment. It’s one stock I won’t fight the market on because I just can’t get enough visibility on what the debt ledgers are actually worth and in turn the robustness of the reported earnings figures.

 

[VSntchr]

Earnings are a residual accounting number after the amortisation of the PDL’s.

The earnings figure are correct only too the extent the written down values of the PDL’s is correct.

Good point.
I am thinking that the best way to track this and trigger an early warning signal would be Amortisation % of carrying PDL value?

Assuming the investor approaches CCP as a long term investment, it is the cumulative and long term free cash flows that matter, so year to year the FCF figure doesn't mean as much - but if the amortisation % was to vary this could be a sign that something is being manipulated.

If the % was to increase, that would be bad as it would show that the company is purchasing a higher proportion of debts that it cannot recover (or in another way: they are overpaying).
If the % was to decrease, that could suggest two things. The first is that the company is pricing very effectively and is becoming more successful at collecting. OR it could be the accountants artificially inflating earnings by restricting the amortisation.

If you take a view over a number of years, it becomes more difficult for the numbers to be manipulated without it becoming more and more obvious to the investor.

The above questions and possible scenario's highlight that you have a very valid point and I'm glad you have given me something to consider and keep in mind.


EDIT:
After re-reading I wanted to add that even if the numbers are not being manipulated, it is the skill and conservatism/optimism of those doing the accounting that need to be relied upon.

 

[VSntchr]

Not sure how much value there is in the below, but it has given me a better understanding of the business and a few metrics to keep an eye on.

First up is the amortisation compared to the carrying value of the PDL portfolio.


Here is a chart showing PDL purchases compared to the amortised value on an annual basis since 04.


For a different perspective, this chart shows the actual collections CCP has made against the amortisation.


The message I have taken away from the above charts is that pre 2008 Credit Corp was far too agressive and too ambitious with their low amortisation rates. It would appear that management has found a comfortable level of amortisation of PDL's as it has flattened out after skyrocketing post the CCP collapse in 2008.
Crafts point above still holds though, and we won't know for sure if these levels are sustainable until we get more data in future reporting periods.




Finally, here is a chart which shows that CCP has been increasing recurring revenue since 2007 by increasing the proportion of customers on payment plans.

 

[craft]

Awesome VS

I feel humbled that somebody has responded to a point I made, so positively and comprehensively.

I hope the understanding you gained from the exercise serves you well.

Cheers

 

[piggybank]

Very Impressive VSntchr. What is the name of the program please?

Cheers
PB

 

[VSntchr]

Very Impressive VSntchr. What is the name of the program please?

Cheers
PB

Sorry PB just saw your post, it's actually just done through Excel - nothing fancy here.

 

[VSntchr]

Time for another post on CCP.

CCP has been a good example of a company with a fluctuating capital structure. The debt ratio reached levels of ~80% over the 2007 era which was largely due to share price capitulation, but not to distract from the fact of having ~$130m of debt which would be over 30% at todays market value of equity.

The company took only 4 years to aggressively pay down the debt out of strong FCF to be debt free by 2011.

What's interesting is that the last couple of financials show that CCP has started to take on debt again. I think that the company planned this quite well - pay down debt and decrease default risk while consolidating internal operations and improving business performance. Now that they have finished that phase, they are moving onto their expansion plans both with the lending foray and the US debt collections.

It is also interesting that the market (perhaps correctly, or perhaps not) is in my opinion pricing CCP as ex-growth.
Taking the FY15 (conservative) expected free cash flow of $22.6m, the market value of the company of $447 and imputing for the growth rate (assuming that CCP is now in stable growth) provides a market expected growth rate of 4.68%.

So if the assumption is made that CCP is a mature company, perhaps the optimal capital structure can be looked at.
The table below shows the value of CCP at varying debt ratio's. Note that I have capitalised operating leases (hence the debt is a little higher than the reported figure). Also, the value is calculated based on the imputed growth rate of 4.68% that the market is implying by pricing CCP at $8.80.

*Blue shows current structure, green shows optimal.

So if CCP is a mature company and can no longer achieve excess returns the table above shows that keeping in-line with the economy and tweaking the capital structure a bit may deliver decent value to shareholders for years to come.

Additionally, if CCP is on point with their new investments - then earnings should be able to outgrow the imputed 4.68% with relative ease over the next decade.

 

[Ves]

Taking the FY15 (conservative) expected free cash flow of $22.6m, the market value of the company of $447 and imputing for the growth rate (assuming that CCP is now in stable growth) provides a market expected growth rate of 4.68%.

Hey VS

Which formula are you using to reverse engineer the calculations to work out the implied growth rate? I haven't really explored these sort of calculations myself - so would be interesting to know.

 

[VSntchr]

Hey VS

Which formula are you using to reverse engineer the calculations to work out the implied growth rate? I haven't really explored these sort of calculations myself - so would be interesting to know.

Hey Ves,
The formula is just: Firm Value = FCFF(1+g) / (Cost Capital - g)


It's my first time delving down this road, so could be some mistakes in what I've done...
I've found it useful to compare what the market is "implying" in the way it prices the stock, in comparison to what my own expectations are.
This allows me to research further and search for risks, headwinds, tailwinds, opportunities etc that I might be missing if my expectations are wildly different.

 

[Ves]

Hey Ves,
The formula is just: Firm Value = FCFF(1+g) / (Cost Capital - g)

Thanks for that. I did some math (beware!) Does that mean you are implying that the market is using a cost of capital of 8.78%?

EV on the figures quoted in your post was MC of $447m + $130m debt = $577m.

$22.6m (1+4.68%) / (8.78% - 4.68%) = $577m

Cost of capital of 8.78% seems a bit low? Is there any reason for this?

By the way, I enjoyed reading your analysis on the capital structure, it was quite illuminating. Just trying to tidy the calculations up in my head.