In November 2015, we published a brief note outlining Credit Corp (CCP) as a unique value opportunity in the market. The following year, CCP’s price nearly doubled from May to October, and in August 2016 we wrote a follow-up piece diving deeper into the stock and its prospects. CCP was at the time a staple of the StocksInValue model portfolio and Clime’s funds but was exited late last year after a rally of almost 100% saw it climb above our valuation. Since then, CCP has continued to grow its business and currently stands on the precipice of two exciting developments which we feel warrant taking a second look – reaching critical mass in its consumer lending business and realising its inaugural profits in its beleaguered US PDL purchasing business. In addition, it has fallen back to a reasonable price in the market, and once again offers a discount to what we believe is its intrinsic value.
The logic behind CCP’s original expansion into consumer lending was predicated on the vast bank of credit data it had collected from the debt ledgers it was purchasing. It used this data to create accurate pricing algorithms that could effectively allow CCP to offer lower rates and fairer terms than their competitors, by avoiding riskier customers. CCP has grown this division rapidly under the Wallet Wizard brand, though admittedly off a low base. FY17 will mark an important point for the business where it has reached a scale sufficient to support margins closer to those of the core business. As it reaches this point, CCP will be able to broaden the scope of its service offering to other financial products, whilst simultaneously expanding the existing loan book.
Figure 1. CCP divisional EBIT margins
Source: Company reports, Clime estimates
The other notable development is that, after many years of toiling away in the unforgiving US debt buying market, which has suffered from weak supply and a hyper-technical regulatory regime, CCP is set to realise a profit here for the first time. On the supply side, increases in credit card delinquency rates have been seen for the first time since the GFC and charge-off rates have continued to edge higher. The regulatory environment remains a risk, but there have been efforts made to reform certain rules and clarify others, creating more rational conditions. The market currently attributes little to no value to the US business, but in reality, if profitability can be sustained, it could quickly become a massive opportunity for CCP. The US debt buying market is ten times larger than that of Australia’s, and as such, could quickly become a major growth driver for the business. In our view, it is probably still too early to say whether recent improvements in the operating environment are sustainable, but at current prices, it is close to free upside, which is always attractive.
Perhaps most importantly however, CCP has fallen back below its 12-month forward intrinsic value of $20.04. At current prices, it is offering a 12-month estimated total return of >20%, including a c. 3.8% fully franked dividend. We believe that CCP will need to show the US opportunity is real, and that weaker supply in Australia is cyclical, before the price reflects true value. In our view, both updates could come at the next results, making it a pivotal one for the group. CCP has definitely come back onto our radar, and if signs that operating conditions are improving indeed proves true, it could be time to get excited again.
Figure 2. CCP prive/value chart