Credit Corp [ASX:CCP] – Under-promise & Over-deliver

Even in a world of ridiculously low interest rates and (mostly) overvalued sharemarkets, the bipolar drunk that is Mr. Market still offers the rare chance to grab a healthy, strong company with bright prospects, at discounts to intrinsic value.

On the 28th of November, I bought Credit Corp [ASX:CCP] at $8.90. First off, a brief intro to the company:

  • Credit Corp is a company that specialises in debt collection. Its largest division purchases consumer debts at a discount to their face value from credit providers with the objective of recovering amounts in excess of the purchase price.
  • Credit Corp also has a consumer lending business offers various financial products to credit-impaired consumers. The Company, under the brand, Wallet Wizard, offers loan amounts that are supported by an online decision engine.
  • In addition, the Company purchases unsecured past due receivables, including credit cards, personal loans, telecommunications and utility accounts. The Company’s customers include banks, financial companies, telecommunications and utility providers.

So why did I choose to buy? Well, I want to buy companies that are (A) great quality, and (B) trading under their ‘true’ value. So let’s start by looking at QUALITY…

  • First and foremost, I want a company with outstanding financial performance. Return on Equity (ROE) is a key performance measure to look at, and in the case of CPP has been very, very healthy, at >20% since 2011, which is fantastic!
  • This isn’t just impressive when compared to the market, its also impressive when compared to competitors. Take Collection House (ASX:CLH) which has an ROE averaging around 13%.
  • In addition to being high, ROE has also been very stable for the last few years. This is great, as its easier to estimate the value of a stock with a stable ROE profile vs. a stock where business performance is erratic.
  • Balance sheet is quite strong, with LT debt only 26% of capital. This is good, as I prefer to invest in companies with low debt.
  • CCP has a track record of ‘under-promising’ and ‘over-delivering’ – i.e. upgrading profit guidance. This is a very pleasant pattern for a shareholder.
  • Russell Muldoon from Montgomery Investment Management has discussed this pattern on their blog (which, by the way, is outstanding) –> see http://rogermontgomery.com/ccp-underpromise-overdeliver/
  • In addition to exhibiting fantastic financial performance, Credit Corp is also a great stock in that it has ‘counter-cyclical’ qualities. In other words we can expect it to do well when the economy as a whole is doing badly.
  • My reasoning for the above goes something like this: When the economy does bad (particularly such an indebted economy as Australia’s), people fall on hard times and have difficulty repaying their loans. Bad debts increase.
  • On one hand this hurts Credit Corp (in the short term), since it will have a tougher time trying to recover bad debts as more people are struggling to make ends meet.
  • BUT, on the other hand, the supply of bad debts increases in the market, meaning that players like Credit Corp should be able to buy these debts at cheaper prices (law of supply and demand), and grow their business.
  • The first effect – increased difficulty persuading people to repay – is in many cases transitory. People may take longer to repay, or only start to repay when they find employment again, but in the end they do have an incentive to make payments eventually (to mitigate damage to their credit rating).
  • The second effect take some time to kick in, which is why its under-appreciated by the market which is overly focused on the short-term rather than medium-long term.

SO…to sum up – a great company, with a long and strong track record of robust financial performance, a strong balance sheet, and counter-cyclical qualities.

Now to the second part – VALUE

  • I’ll talk more about my valuation methodology in future posts. However, suffice to say I value the shares at between $11.50-$13.00 based on whether you use optimistic/conservative assumptions.
  • This means that at the time of buying (end of November), I believe CCP was trading at a discount of at least 24% (under conservative scenario).
  • Why so cheap?
    • Market is fixated with short-term issues and ignoring the long-term prospects, which are bright.
    • CCP recently announced that they were exiting the small loans business, after a scathing attack from ASIC, despite arguing that their product was unfairly being labelled as a ‘payday loan’ when it was actually quite different. Market had a very negative reaction, despite the fact that this was a tiny portion of their business and CCP stated that this would be pretty much immaterial to their revenue.
    • A competitor, Collection House (ASX:CLH) previously announced lower growth, and that competitors (i.e Credit Corp) were buying bad debt at prices that weren’t favourable to shareholders. It cited poor economic conditions, and increased difficulty in persuading borrowers to repay bad debts.
    • The market completely misinterpreted the above. Poor economic conditions are transitory – when I’m looking at buying a company I’m investing for the long term. Conditions will eventually improve, and borrowers in tough times will regain the ability to honour their debts.
    • At the same time the market missed the silver-lining. Poor economic conditions in the short term, mean an increased supply of bad debts somewhere down the track, which can be purchased at more attractive prices.
    • The market has also been reacting very negatively to Credit Corp’s expansion into the US market, which is a much much bigger market and was previously touted as a key growth opportunity.
    • This expansion has had difficulty getting of the ground due to regulatory and timing issues. However, again, I feel this is a temporary issue, and not due to incompetence or operational problems.

So to summarise the above – once again, the market is overly focused on short-term issues. But if we look through these and focus on the underlying reality, I believe that CCP has a strong future. Furthermore, I think its counter-cyclical qualities make it a great inclusion for my portfolio at this point in time.

Well, that almost concludes my first post for Rich Pickings!

One final thing…a few days after purchasing CCP shares at $8.90, Credit Corp announced upgraded profit guidance (yet again), and the stock is now trading at $10.20 – a 15% increase in just over a week!

Thanks for reading, and look forward to sharing my future stock picks with you soon!

DISCLAIMER: this post is simply an expression of the authors private opinions, and does not constitute financial advice to buy or sell securities of any type. Before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking advice from a professional financial advisor if necessary.