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Huntleys Recommendation: Credit Corp Group Limited ( CCP )
Recommendation: Hold
CCP is a specialist purchaser and manager of debt ledgers, acquiring them from a variety of preferred financial institutions and credit providers. The business has grown to incorporate a mercantile collections division which provides commissions on debts collected for clients. CCP's process serving division is one of the largest legal support providers in Australia. Success depends on CCP’s ability to continue purchasing quality debts at appropriate prices. The recent profit downgraded increases the risk profile of the business and makes the stock unsuitable for risk adverse conservative investors.

Event
Last Update - 28/11/2007
CCP’s shareprice halved earlier this month following revised NPAT guidance from $24m down to $17-$19m. The announcement marks the end of a honeymoon which saw the share price up fivefold over the past two years within an industry known for its shady history and ongoing corporate disappointments.

Business Impact: CCP blames the downgrade on higher employee and infrastructure costs combined with ‘a change in the mix of purchased debt ledgers’. We can understand the former given industry wide labour shortages and inflationary pressure but struggle to understand the legitimacy of the latter. It also announced for the first time it took a strategic decision in late FY07 not to repurchase a particularly type of asset. This was in response to pricing pressure, something we reiterated in our reports and investment thesis through the year. We think the real reason behind the downgrade is lower than expected collection volumes due to rising interest rates and tightening discretionary spending. Debtors will usually prioritise their commitments ranking a delinquent loan lower than a current commitment. We lower our acquisition assumptions over our five year forecast period. We reduce our FY08 and FY09 NPAT and EPS forecasts by 26% and 25% respectively. The lower shareprice makes it harder to raise money by issuing stock and the existing debt facility is almost fully capped. We now add a business risk premium which increases our cost of capital to 10.9% from 9.7%. Our DCF valuation falls by 45% to $5.70, assuming no fundamental changes to the business model or existing ledgers on balance sheet. Business and price risk are both revised to High.