Give credit where credit's due

The remarkable track-record of Australia’s largest listed debt buyer makes Credit Corp worthy of attention. Following today's FY18 results announcement, we share our view on the stock, which we think deserves more credit from the market. 

Mature, maturing and embryonic businesses

Buying banks' bad loans has been a lucrative business with the company, doubling shareholders’ investment over the past 5 years. And look back 10 years to the aftermath of the GFC and Credit Corp is up 20-fold. 

Will the future look as bright though? While Credit Corp is up a reasonable 11% (including dividends) over the past year, it has started to lag the Small Industrials which is up 19%. 

The focus of this result is on the three parts that make the whole:

• The Australian core debt buying,
• Australian lending and
• The US debt buying business. 

The result today showed these are mature, maturing and embryonic businesses respectively. 

Here lies the challenge for investors; Credit Corp is aging albeit gracefully. The result showed good progress in collections efficiency in the US which has given management confidence to increase staff numbers and future debt purchases in that market. 

Modest earnings growth guidance appears achievable but is reflected in consensus expectations. 

Nevertheless, the promise of the US opportunity and a forward PE of 13x leaves some scope for share price appreciation. 

US market opportunity holds promise

Credit Corp has been listed for 18 years and appears to be going through a graduation of sorts from the highly profitable but mature Australian businesses, to the immature but – to date – immaterial US business. 

The company has high hopes for the latter, but it has been a slow boil. Credit Corp started the US business six years ago and it only passed breakeven this year. Patience may yet be rewarded. 

The US business is important as it will allow management to remain rational around debt purchase prices in the domestic market. The risk for Credit Corp is they can be victims of well-funded competitor’s ill-discipline around debt pricing driving returns below acceptable levels. 

Access to capital is a barrier to entry in the debt buying business and capital appears abundant right now.  By way of example, domestic competitors Collection House (ASX.CLH) raised debt purchase guidance in May and Pioneer Credit (ASX.PNC) raised debt capital in March. 

We are cautious on industries where there appears to be excess capacity, as all else equal this excess capital drives down returns. 

The US holds more promise given the indebted nature and recent near-death experience of some players, and feedback there has been a retreat of private capital from the industry. 

Market not giving Credit Corp the Credit it is due 

Credit Corp is the 26th most shorted stock on the ASX with 7.6% of Credit Corp’s shares having been borrowed and sold. The company was also subject to an amateurish short attack in June which briefly saw the stock down a fifth.  We are not this bearish. Excess capacity takes time to manifest itself through lower returns on capital.  Credit Corp’s board and management have a track-record of capital management excellence and are heavily invested in the stock. 

The US expansion has the potential to be a material contributor albeit not until 2020 or beyond. A 4% fully franked dividend yield that grows at double-digit rates makes valuation fair. 

For all these reasons we do not think the market is giving the company the credit it is due.