CCP - Credit Corp Group

[VSntchr]

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.

$447m was total firm value, I should have been a bit more clear. MC of $406m plus $41m debt (I already found my first error - the calcs above I have $33m for current debt). Shouldn't affect result much though (the extra $8m is just the operating leases, which many wouldn't capitalise anyway).

I just re-checked with the cost of capital put in from the table (9.89%) and it gives EV at $452.
Even so, I agree with you that this is a pretty low cost of capital, but generally most of the companies I follow have pretty low WACC's at the moment. Which I believe is a function of the following: 10yr gov bond at ~4.15%, most have a beta below 1.30 and aren't operating in risky places like Africa etc..

What worries me, as I am quite inexperienced in watching valuations over a LONG period of time, is how badly stock prices are going to be dragged down once 10yr bond rates start going back up. At 4.15% we aren't in too bad of a situation, but the USA @ <3% will be impacted pretty heavily - I guess it depends on how long it occurs over and what happens to earnings in the meantime. Either way, its a tailwind to keep in mind.

There was a paper circulating a few weeks back where buffet talks about interest rates and their effects on stock prices, it was pretty fascinating at how profound the affects can be over decade-plus long periods.

 

[Ves]

$447m was total firm value, I should have been a bit more clear. MC of $406m plus $41m debt (I already found my first error - the calcs above I have $33m for current debt). Shouldn't affect result much though (the extra $8m is just the operating leases, which many wouldn't capitalise anyway).

I just re-checked with the cost of capital put in from the table (9.89%) and it gives EV at $452.

Makes more sense now. Looks like I was partly at fault too. I misread the top part of your post re the debt of $130m as being current debt, rather than the debt they had in 2007.

If you assume a growth rate of 4.68%, FCFF of $22.6m and an EV of $447, then the market is implying a cost of capital of 9.97% (which is reasonable enough and close to your calculations).

This sort of calculation could give you a perspective to think about in terms of how the market as a whole may be pricing the business, but as you said you couldn't rely on it in a meaningful way. The assumptions within (especially in the fact that perpetual growth rate of 4.68% appears to be well above Australia's GDP trend growth) are not really that conservative! The implication being that a company cannot grow at a rate higher than the economy into perpetuity, otherwise it would become that economy eventually!

Even so, I agree with you that this is a pretty low cost of capital, but generally most of the companies I follow have pretty low WACC's at the moment. Which I believe is a function of the following: 10yr gov bond at ~4.15%, most have a beta below 1.30 and aren't operating in risky places like Africa etc..

What worries me, as I am quite inexperienced in watching valuations over a LONG period of time, is how badly stock prices are going to be dragged down once 10yr bond rates start going back up. At 4.15% we aren't in too bad of a situation, but the USA @ <3% will be impacted pretty heavily - I guess it depends on how long it occurs over and what happens to earnings in the meantime. Either way, its a tailwind to keep in mind.

There was a paper circulating a few weeks back where buffet talks about interest rates and their effects on stock prices, it was pretty fascinating at how profound the affects can be over decade-plus long periods.

Indeed, low interest rates drag down the risk-free rate, and in the view of a lot of market participants this has the effect of reduced WACC.

I personally don't use WACC in my valuations (I have a hurdle rate that the investment either meets or I stay in cash) so my bottom line calculations are not directly impacted by the effect (however, the market's pricing of risk at any one time may impact on my range of opportunities to invest). My hurdle rate is about 15%pa before tax, so usually it is in excess of the WACC in most climates, especially now.

Damodaran had a discussion last year about low interest rates currently and their impact on long-term valuations as well. It was on his blog Musings on Markets, just flick through the archives if you're interested.

 

[odds-on]

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.

Hi VS,

Good work on this thread, very interesting reading.

I read a book a few years back and think you might find it useful. http://expectationsinvesting.com/

Do you recognise the authors?

Cheers

 

[ROE]

Uncle Don put out close to a cool 900K to buy more CCP shares
I decided to do the same, load up another 4000 shares

it is undervalue by my metrics I need an insider confirmation

 

[VSntchr]

This sort of calculation could give you a perspective to think about in terms of how the market as a whole may be pricing the business, but as you said you couldn't rely on it in a meaningful way. The assumptions within (especially in the fact that perpetual growth rate of 4.68% appears to be well above Australia's GDP trend growth) are not really that conservative! The implication being that a company cannot grow at a rate higher than the economy into perpetuity, otherwise it would become that economy eventually!


Indeed, low interest rates drag down the risk-free rate, and in the view of a lot of market participants this has the effect of reduced WACC.

I personally don't use WACC in my valuations (I have a hurdle rate that the investment either meets or I stay in cash) so my bottom line calculations are not directly impacted by the effect (however, the market's pricing of risk at any one time may impact on my range of opportunities to invest). My hurdle rate is about 15%pa before tax, so usually it is in excess of the WACC in most climates, especially now.

What sort of rate do you think is fair to assume for long term stable growth (making the assumption that the company exists forever)? I would think nominal GDP growth would be the best estimate, which again is close to the risk free rate. Sectors come into play here, as you would have more confidence of a company in healthcare growing at something equal to or even slightly above the GDP figure, while something such as print media would have no hope of even coming close to matching the economy. Even with something like healthcare its hard to assume that it can grow over the average as we are talking FOREVER, which you pointed out above.

I think your 15% hurdle rate approach is very sound and something I should be incorporating more into my work.

Hi VS,

Good work on this thread, very interesting reading.

I read a book a few years back and think you might find it useful. http://expectationsinvesting.com/

Do you recognise the authors?

Cheers

Nope, never heard of the authors before, I'll add it to my reading list - which is currently becoming quite daunting thanks!

 

[Ves]

What sort of rate do you think is fair to assume for long term stable growth (making the assumption that the company exists forever?

I don't really answer this question in my valuations because I take a fairly conservative approach to anything outside of my initial cash flow forecast period and do not incorporate any growth into my terminal calculations at all. If this happens, fantastic, I will be rewarded handsomely, but I would rather not pay for the risk.

For my terminal value calculations (which I realise are commonly expressed as a perpetuity in DCF theory) I consider the strength of the firm's competitive position and their ability to sustain it and where I think it will be at the end of my forecast period.

I weigh this up against what I believe are the net replacement cost of the firms assets (it sounds scientific, but really it is just a judgment call and sometimes you have to rely on the balance sheet).

The terminal value falls in between a perpetuity (based on my best estimate of the firms FCFF representative of the whole economical cycle) and the net replacement cost. The more sustainable I think the competitive advantage is, the closer my terminal value will be to the perpetuity.

Obviously if there is no competitive advantage it is always net replacement cost of the assets for the terminal value (or less if the firm is uneconomic, but I don't touch those).

I think this approach really forces you to think in terms of probability (not exact science) and to form convictions on the business' competitive position (which is the whole point for my style - ie. hold until the business tells you not to hold). If you are buying in order to sell to vindicate the investment then this may or may not fit your purposes, but I treat investments as income streams in the same sense as Buffet, so works for me.

 

[ROE]

This sort of calculation could give you a perspective to think about in terms of how the market as a whole may be pricing the business, but as you said you couldn't rely on it in a meaningful way. The assumptions within (especially in the fact that perpetual growth rate of 4.68% appears to be well above Australia's GDP trend growth) are not really that conservative! The implication being that a company cannot grow at a rate higher than the economy into perpetuity, otherwise it would become that economy eventually!

Indeed Company cannot grow at a faster rate than their market but CCP is no where near there.

The way I see it CCP is building itself into a diversified financial company, its root is in receivable but
its future lies in diversified financial business, all IMHO

It already has very good data analytic system in place to calculate risk and credit worthiness it makes senses now to expand and price risk in other financial area

The business it get into, the directors it appoint to the board seem it is heading that way.

and the Chairman aren't laying out 900K to buy shares just to see it sits still....it is a massive vote of confident for the future of the business

 

[ROE]

end of FY ... no nasty surprise so I assume it meeting guidance so little down side from here.

question now how much dividend and its comments on future earning comes confession time.

 

[VSntchr]

end of FY ... no nasty surprise so I assume it meeting guidance so little down side from here.

question now how much dividend and its comments on future earning comes confession time.

ROE, what are your thoughts on the US operations?
The comment in a recent presentation about management taking on inferior returns due to competitive pricing was potentially a concern; it doesn't model the way they have treated PDL acquisitions here in AUS which is to only acquire if it meets strict hurdle rates. Granted that the US is a different market and this decision could be influenced by marketing decisions to gain market share and keep a presence on various purchsing boards. The legislative environment is also changing rapidly over there too, which differentiates their market to ours in terms of the approach required.

Just wondering if you have any thoughts additional or in contradiction to the above?

As always, looking forward to the FY accounts

 

[ROE]

ROE, what are your thoughts on the US operations?
The comment in a recent presentation about management taking on inferior returns due to competitive pricing was potentially a concern; it doesn't model the way they have treated PDL acquisitions here in AUS which is to only acquire if it meets strict hurdle rates. Granted that the US is a different market and this decision could be influenced by marketing decisions to gain market share and keep a presence on various purchsing boards. The legislative environment is also changing rapidly over there too, which differentiates their market to ours in terms of the approach required.

Just wondering if you have any thoughts additional or in contradiction to the above?

As always, looking forward to the FY accounts

you spot on there, too early to know at this stage have to see what the return are ...

hard to beat Aussie ROE/ROC in other markets ...it is not just CCP all other business
face it when they go oversea, Australia is a unique market, once you got a foothold and a decent model, you tend to command very good return on capital....

if Woolies and WES venture outside I can be 99% certain they can't command the same margin and/or return on capital.

I will be happy if they can command lower return outside, as long as it not shabby lower like
7-8% or something but 11% plus is ok with me and hope to yield a bit more over time...

 

[ROE]

Another good set of result ...dividend up again and still growing

 

[VSntchr]

Another good set of result ...dividend up again and still growing

Yeah its more of the same for CCP.

Looks like they are confident in lending taking over the growth for the next few periods while PDL market continues to remain highly priced.
Good to see they now will have a multi-pronged approach in the coming years (importantly with equal target returns) and don't rely on one segment alone.

 

[McLovin]

It looks as though they're finding the US much more challenging than they thought. Good result, nice to see they move to diversify the revenue base has paid off.

 

[ROE]

Their interest cost is around 5% and they getting 15-20% on the lending size
they need a massive default or massive compression in margin to see this side of the business
going bad any time soon.

it be interesting come FY16 and 17 when lending book get into hundred of millions

 

[VSntchr]

It looks as though they're finding the US much more challenging than they thought.

I agree. I was a little worried the first time that they mentioned accepting compromised returns in the US while waiting for market conditions to reverse. They have not accepted compromised returns in AUS and prefer to face reducing PDL purchases. I have so far given them the benefit of the doubt...

I think it's clear that the reason they are prepared to stick around with the US is because they see the potential in the market and think that the short term pain is worth it...I will be watching closely to see if it doesn't turn into a case of saving face....but for now I think it's far from that.

 

[Huskar]

I'm not so sure it was that good a result: ballooning of receivables as compared with revenue growth as well as lower depreciation charge and higher debt indicate to me some cosmetics and therefore concern with topline figures. Perhaps this is just an aberration due to the "one-off opportunities" in the first half (which were not named as such in HY report - only in FY) and figures will normalise but something to be on the lookout for.

Just being devil's advocate because this is a company I very much admire.

 

[McLovin]

I'm not so sure it was that good a result: ballooning of receivables as compared with revenue growth as well as lower depreciation charge and higher debt indicate to me some cosmetics and therefore concern with topline figures. Perhaps this is just an aberration due to the "one-off opportunities" in the first half (which were not named as such in HY report - only in FY) and figures will normalise but something to be on the lookout for.

Just being devil's advocate because this is a company I very much admire.

The increase in receiveables is a function of the growing loan portfolio...loans outstanding = receiveables.

 

[VSntchr]

One thing I did notice was "other expenses" doubled YoY, unfortunately we don't get a detailed breakdown of that account...but it might explain the reason why FCF wasn't a bit better in H2 considering that H2 funding on lending and PDL combined was ~13m less than H1.

 

[ROE]

One thing I did notice was "other expenses" doubled YoY, unfortunately we don't get a detailed breakdown of that account...but it might explain the reason why FCF wasn't a bit better in H2 considering that H2 funding on lending and PDL combined was ~13m less than H1.

probably the US operation rapid expansion which they put on a ice until better time
which I think a sensible thing to do ... cant get the required return ice it for a while.

 

[Ves]

One thing I did notice was "other expenses" doubled YoY, unfortunately we don't get a detailed breakdown of that account...but it might explain the reason why FCF wasn't a bit better in H2 considering that H2 funding on lending and PDL combined was ~13m less than H1.

Isn't most of it from the increase in provisioning for estimated bad debts due to the bigger receivables balance at 30 June 2014? Check note 9 I think it is... fairly sure the movement in that provision is expensed (ie. CR provision DR expenses).

I don't follow this company very closely... btw.