Credit Corp is the leading debt collection business in Australia and has established a growing presence in the US over the past five years. The company buys non-performing loan portfolios from banks at a significant discount to face value and manages the collection of this debt over time. The management team is well regarded by investors and the company has a strong track record of earnings growth, with an average earnings-per-share growth rate of 15% per annum, over the five years to the 2017 financial year.
Credit Corp reported its first-half 2018 financial year result on 30 January. Despite achieving earnings per share growth of 17% over the prior corresponding period, retaining full-year earnings guidance and meeting consensus expectations, the stock has fallen by approximately 10% following the result. This reflected some expectation of an earnings upgrade leading into the result, while the stock price had also recorded a strong run in the second half of 2017.
Following this sell-off, the stock is now trading 12% below our one-year forward valuation and offers a 3.5% fully franked dividend yield. Moreover, Credit Corp looks set for strong earnings growth over the next few years, led by its fast-growing US debt buying business, which could present valuation upside if successfully executed by management.
The below chart highlights the growth opportunity from Credit Corp’s US expansion. Debt collection is a labour-intensive business, so the headcount of the business is strongly correlated with the amount of debt the company is buying and the earnings it is delivering – provided they are buying debt at the right price relative to what they collect. Management is in the process of securing a move to a new facility, which will enable them to expand their US headcount to 350 people from approximately 220 presently. They also plan to establish a second site of a similar size in the next 12 months. This planned expansion could accommodate a debt buying operation of approximately $160m, which compares to the $55m the company has contracted to buy in the current financial year. That would represent a similar size to the Australian debt collection business, within an estimated time frame of 3-5 years.

Figure 1. CCP’s US headcount
Source: Company presentation
Management has built the US presence carefully over a number of years and continues to control purchasing decisions and debt collection protocols from the head office in Australia, ensuring they maintain their historical diligence with regard to returns on capital deployed. The pricing of distressed debt sales is cyclical and current conditions are favourable for expansion in the US. At the same time, competition has increased in the Australian market, so that maintaining the current level of purchasing here would be a good result.  Finally, Credit Corp has an Australian consumer finance business which currently accounts for 20% of group earnings and recorded annualised growth in the loan book of 14% in the recent half year. Combining these elements, we forecast a 3-year forward earnings per share growth rate of 16% per annum, which looks relatively attractive in the context of a 15.0x forward PE multiple.
Risks to be aware of include any changes in the credit environment, which could negatively impact the collectability of debts and the willingness of banks to provide debt funding to Credit Corp. The unemployment rates in Australia and the US are a key indicator here and are currently moving in the right direction. Interest rates are also a factor, as they determine the cost of borrowing, which then needs to be factored into the price paid for debt. Finally, the significant expansion in the US requires disciplined execution by the management team. Management has a strong track record in Australia and has been careful to establish the US platform over a number of years, so we will be watching with interest.
 
Clime Asset Management owns shares in CCP on behalf of mandates for which it acts as investment manager.