Security price: $10.42
Industry: Financial
Forecast distribution: 48 cents per share
Credit Corp (CCP) currently represents something special in this volatile, anxiety-inducing market. It is a growing but defensive business trading at a substantial discount to value – and offering a healthy dividend. Unlike many other undervalued stocks in the market, CCP has not downgraded earnings, is not facing major cyclical or structural challenges and is not in an overtly precarious position. Rather, CCP’s current share price reflects several misconceptions about what it is that they do.
CCP purchases impaired debt ledgers from banks and other financiers at steep discounts to face value, and profits by collecting a higher percentage of the debt than what it paid. More recently, it has leveraged its vast data bank of credit information from this business to launch a consumer lending business offering small loans with various durations and rates.
The problem is that CCP is seen as a payday lender, a term which refers to small, high interest loans which target low income earners, and typically have shorter durations, less than 90 days. CCP has never offered such loans but has still been branded as a payday lender. This led to several issues. First, Westpac, one of CCP’s primary financiers, announced it would cease funding pay day lenders, causing the market to believe CCP’s funding would be at risk. CCP responded by announcing its exit from small amount credit contract (SACC) lending, ensuring its relationship with Westpac remained solid.
The second issue and the one that has most affected the share price is that this misconception led several large US institutional investors, Denver Asset Management chief amongst them, to sell out of its position. This has put significant downward pressure on the stock price, and should cease by the end of November.
In stark contrast to these imagined problems, CCP recently released some tangible good news in the form of an AGM-day upgrade. Net profit guidance increased 5% to around $43m whilst debt purchasing guidance (the key leading indicator of future earnings) increased nearly 30% to around $135m. Pleasingly, net lending volume guidance of $30-$40m has remained unchanged despite the company’s decision to exit SACC lending, implying that the remaining consumer loan book is tracking ahead of expectations.
Additionally, CCP’s budding but unprofitable US debt purchasing operations are nearing break even, and are set to turn their first profits in FY17. In our view, this has the potential to become a significant driver of future earnings growth but has not been priced in by the market.
We derive an FY16 valuation of $13.83, and continue to see significant value at current prices, in addition to an attractive dividend yield of over 4.5%. We believe that the price will return towards value as institutional selling pressure from the US subsides and that current weakness represents an ideal entry point for prospective investors.
Written By Damen Kloeckner, Associate Analyst