ASX Code: CCP
Security price: $11.36
Forecast distribution: 42 cents per share fully franked
Credit Corp is Australia’s largest “credit receivables” company. Basically, its core business is to buy debt ledgers from large financial institutions and telcos.
Credit Corp pays a proportion of the total value of the debt. It then earns a mark-up when it goes out and collects the debt.
While the company doesn’t have a very high dividend yield, we think there is potential for increases in payments.
Along with strong financial performance and some defensive qualities in a low-growth economy, we think that upside could make it potentially attractive for patient income investors.
Australia’s economic growth has slowed significantly with the end of the mining boom and cut backs in government spending. Many economists are forecasting a period of below-average growth and higher unemployment, which could create pain for leveraged families.
Bad debts are correlated to higher unemployment, credit and household debt. As bad debt rises, so too can the availability of ledgers and hence, the potential for Credit Corp’s earnings growth, though pricing of ledgers is also important.
Credit Corp has been performing well. In January it announced a 17 per cent rise in net profit after tax to $20.1 million.
Credit Corp has also been diversifying into consumer lending, with a focus on customers with bad credit records. That business produced an inaugural NPAT of $2m in the first half and delivered almost all of the company’s revenue and profit growth in the half.
Credit Corp also has a foothold in the US, with a business in Salt Lake City, which is performing in line with expectations.
The company has a strong balance sheet, with gearing of just 16 per cent. It has a progressive dividend policy and declared a 10 per cent increase in its interim dividend to 22c per share, fully franked.
The company is forecast to pay a dividend of 42c per share fully franked in 2015. That’s a yield of just 3.7 per cent. But we think there is upside to dividend payments given Credit Corp’s low levels of gearing, a large franking account balance, and the recent updated guidance.
At $11.36, Credit Corp is trading slightly below our forecast value of $12.61. The company has some good defensive qualities in uncertain economy times. A full-blown recession — as opposed to soft growth — is a risk, however.