powerful uptrend, page-21

I think that there are a considerable number of positives about CCP’s performance that deserve better and more balanced recognition:

Firstly, a correction: the share price is not being 'pounded' as a result of the results or guidance being below expectations. Prior to the short sharp correction of the last few days, the SP was up 70% since this time last year and 50% this year alone. Given that the market as a whole has gone nowhere this is a phenomenal performance. A little profit taking, following the release of their great results should not have been entirely unexpected. Today we seem to have put in a floor, with all of that silly selling disappearing.

Not only does CCP have no debt, they are currently throwing off $2m per month in excess Cashflow. Depending on what their PDL acquisitions turn out to be, this figure could be $4m. That means that they could have between $20m and $50m in the bank by the end of the CFY. Their core question for 2013 must surely be “what are we going to do with all of this money?”

The guts of CCP’s issue for the next few years is therefore how can they best expand the business. This is a massively positive problem to have, and one that few business of their size can even dream of. They could open up new business in OZ. They could open up the same business in NZ, the USA or the UK. Or they could weigh up and choose among these options. Anything they choose to do is clearly a higher risk option that doing what they know best, but if they approach these options professionally and incrementally the risks will be manageable.

They have a few options. The easiest option would be to increase the dividends. If they pay out a total of 35 cents per share this will only cost them $15m, which is only $2m more than the current commitment. Personally, although I personally appreciate the Cashflow from dividends, I would prefer that they spent the money on something that would expand the business even more.

Any comparisons to the great SP collapse of 2007 are completely delusional. I think that it is fair to say that prior to the 2007 SP collapse management were suffering a severe case of hubris. This is clearly not the case today. The out of control expansion in 2006-7 was enabled by massive borrowing. The new staff funded by this borrowing did not have the same level of productivity as the older staff and things just naturally and uncontrollably crumbled. This time round CCP, has expanded on the back of internally generated Cashflow, and has also been able to simultaneously pay off all debts, even though these were only at modest levels.

The call centre in the Philippines is a sound expansion; it is cost effective and I assume is being used to expand the business internationally.

It is true that the US is a bit of an unknown. Therefore this needs to be put in context. CCP has become the largest debt collection agency in Australia. This means that unless they expand offshore their overall growth will slow. If they want to retain their growth, they have to do something. Adding 13 people, or even 30 people, is a tiny percentage of the total number of staff. Spending a few million on debt ledgers in the US is also a tiny percentage of total PDLs. If they can apply their experience, technology and expertise to the embryonic subsidiary in the US they could really surprise.

I don’t think it is correct to say that they are becoming a loan company is correct. They are a debt collection company that also offers a limited range of loans. I assume that this option has been on their agenda for ten years or so, because it is a logical thing to do. It will be interesting to see how this goes, but provided they keep the numbers relatively (to the size of the main business) small, they should be able to proactively monitor their own growth and do it responsibly.

The carrying value of PDL’s dropped from $147m to $129m. This may superficially look like the business is shrinking. I think that it is just as likely to be the result of an ‘actuarial/management decision’ to put a bit of a buffer in the balance sheet and for fear of announcing a result that was uncomfortably high. I’m not saying they did this, but in my experience the value of financial assets is not an exact science and various influences and objectives are all taken into account when the final decisions are made. If they have been overly conservative, then this will be reflected in even higher profits in future years.

I remember after last year’s results there was a lot of negative discussion about the tightness of the PDL market and CCP’s difficulty in buying sufficient PDLs at suitable prices to keep the business expanding. These concerns turned out to be misplaced. i am pretty certain that the same conservative statements being made this year will turn out the same way; more PDLs will be bought in 2012/13 that currently indicated and they will be bought at acceptable prices. The fear that margins will be squeezed is simply unlikely to materialise.

Rather than quibble and question about future opportunities, we should be tremendously thankful that management has delivered another set of amazing results.

Well done CCP Board, management and of course the ever expanding team that do the work!

It’s ALL good.
K