Issues brought to light are as follows: 1) newly purchased debt ledgers have not performed as expected - this is contrary to management’s previous responses to our questions. 2) staff productivity remains a problem, due to rapid headcount expansion and; 3) costs in the business associated with staffing, management and infrastructure have increased dramatically.
We now believe there are either few or no economies of scale in this type of business or that present management are not capable of delivering those economies.
Management have always been protective of collection rates and prices paid for ledgers, consistently stating that those figures were commercially sensitive. It now appears such excuses helped management avoid revealing that the dramatic revenue growth being reported was being fuelled by constantly larger ledger purchases and focusing staff efforts on maximising the yield on fresh ledger purchases.
Underperformance of debt ledgers (lower debt collection rates) implies that management may have overpaid for them, reflecting negatively on its pricing discipline, which in the past, was perceived by us a competitive advantage.
With 65% of staff under 12 months of tenure, improving staff productivity, driving efficiencies of scale and hence profitability, might be more difficult than what was initially communicated to shareholders as the business now seems burdened with excessive costs.