Is there now an opportunity to invest in Credit Corp following its share price decline?

With Credit Corp’s (ASX:CCP) share price down 13 per cent after releasing its full year results, wiping out all the company’s gains over the past 12 months, one might reasonably wonder whether an opportunity to invest has presented itself?

Debt collector, Credit Corp appears to have successfully navigated a difficult few years, delivering impressive financial results (about $95 million net profit after tax (NPAT)) despite market headwinds and operational challenges.

The company noted, NPAT fell by five per cent to $91.3 million, with 70 per cent growth in lending NPAT, 43 per cent growth in the consumer loan book to a record $358 million, a 29 per cent decrease in AU/NZ debt buying, and a rise in payment delinquencies in all markets.

The 70 per cent growth in lending was mainly attributable to lower-income consumers in AU/NZ lending, re-leveraging after the pandemic. The growth helped the overall consumer loan book grow by 43 per cent to an all-time high of $358 million.

Despite the above, overall NPAT was down five per cent year-on-year (YoY) to $91.3 million.

Over the past three years, Credit Corp has exhibited resilience considering the material market headwinds and operational difficulties it has faced, including lower sales and the ongoing run-off in Credit Corp’s AU/NZ debt-buying amid interest-bearing credit card balances remaining approximately 40 per cent below pre-COVID levels, and additional costs from resourcing efforts in the US to restore its listless U.S. revenue growth.

After a flat first half in the U.S., the company generated 14 per cent growth in collections, however this was offset by rising delinquencies. Consequently, management has been cautious about growing the U.S. debt book, waiting until pricing aligns with the challenging collections backdrop. This is an approach we have seen Credit Corp employ for more than a decade. But it is also an industry dynamic that has ultimately resulted in the share price remaining at the same level as 2016.

Again, due largely to inescapable industry dynamics, a prudent approach is required to de-lever its balance sheet, position the company to take advantage of better returning opportunities including rationally priced debt books and acquisitions.

As mentioned above Credit Corp’s Australian lending business enjoyed solid growth, which resulted in a meaningful lift in the division’s NPAT. The loan book has doubled over two years, and some analysts forecast the larger starting point to contribute an add an incremental $10 million to FY24 NPAT.

Meanwhile, the AU/NZ debt buying market has seen little activity, which has impacted collections and is adversely affecting NPAT. Active staff management – something I have been aware of since before the global financial crisis (GFC) – will be necessary until the trough in debt buying is established.

In the U.S. however, the picture is different. The market for U.S. debt purchasing is improving, with better supply and superior pricing. One caveat is that the last quarter saw reduced collections thanks to higher delinquencies. As a result, the company has guided lower than anticipated debt buying.

If the company buys fewer receivables’ ledgers it simply can’t make as much money as analysts had anticipated.

Credit Corp’s FY23 NPAT was in line with consensus estimates but FY24 guidance was slightly below expectations, although the trajectory remains positive.

The bulls point to the U.S. market’s compelling growth story, and the recent sell-off providing an attractive entry point. However, it’s worth remembering the AU/NZ experience as evidence of the pro-cyclical nature of the business. This latter reality helps to explain the minus 10 per cent share price performance over the five years to 3 August 2023.