Stock pick: Credit Corp Group (ASX: CCP)
Credit Corp Group (CCP) is a debt collection company that purchases impaired loans from banks, utilities and telecommunications companies. They work with the debtors to arrange flexible repayment terms and in doing so earn a strong return on capital. Strong returns on purchased debt ledgers (PDLs) have been a hallmark of CCP and this held true even during the GFC. The post-GFC years created a great opportunity for CCP as the supply of debt ledgers increased at a time when many of its peers were too capital constrained to create bidding tension.
Examining the situation today, even before COVID-19, CCP’s domestic peers were in serious trouble. Collection House (ASX: CLH) and Pioneer Credit (ASX: PNC) have both used aggressive accounting policies that auditors have refused to sign-off on and are trying to negotiate with their own creditors. In contrast, strong cash collection, conservative accounting and capital discipline have been hallmarks of CCP under its current CEO Thomas Beregi. Thomas took over as CEO in the depths of the GFC and more than doubled its earnings per share (EPS) over the next three years.
Post its recent capital raising, CCP is in a much stronger position to dictate terms within the Australian debt collection market. Gearing is now at just 10% of its asset carrying value and this should enable them to pick up distressed peers at highly attractive prices. In addition, CCP has an advantage that banks do not.
The GFC showed that the market price of impaired debt books will probably fall more than forecast collections, leading to greater returns on purchases following an economic slump. Meanwhile, banks are incrementally lending at lower rates on assets with a greater default probability than before the crisis.
The main risk to Sage Capital's thesis is a government moratorium on debt collection like the interest deferrals being offered by some of the major banks. This seems unlikely as it would create significant problems and moral hazard throughout the wider economy.
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