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Credit Corp Group Credit corpse – Another downgrade

Event

CCP has announced two consecutive profit downgrades in the last three months with the most recent forecast seeing FY08 NPAT down to $10-$12m excluding restructuring costs, more than 50% below the $24m guidance issued at the FY07 result and well below the $17-$19m November target. Forecast FY08 EBITDA is $83-$87m, at least 10% below our revised $97.5m estimate.

Full Event Analysis

Impact

We downgrade our recommendation to Sell and strictly advise against any speculative investment in CCP. Investors brave enough to be holding the stock at this stage should exit on market. The lack of earnings certainty and poor disclosure makes forecasts, price triggers and valuation estimates inappropriate.

We see more downside in the shareprice despite trading almost 90% below its rolling year high. Lack of confidence in management and high levels of gearing could force ledger divestments. Our main fear is a suspension in the trading of securities with investors potentially sidelined until the dust settles. Repcol (RPC) is a perfect example.

Despite promises, any significant turnaround now seems highly unlikely. Chairman Christopher Deane has resigned effective immediately with a strategic review likely to see more senior management departures. The review is expected to cost $5m. Poor purchases due to mispricing and lower than anticipated collection volumes are the two most significant.

In summary, the relatively young and inexperienced management team has mismanaged growth and diminished any competitive advantage built over the past few years. The downgrade is further magnified by the high level of debt, with gearing above 100% of book value. CCP says a substantial proportion of recent purchases have failed to yield expected returns from one particularly forward flow agreement.

CCP expects 1H08 NPAT of $6-$6.2m when it reports on February 14.