Why Is Share Price Tanking?, page-169

Skinsy11

I do not hold CLH, and never have, so I do not keep myself informed of its shenanigans. I cannot say much that is useful, because it is not worth the effort for me to research CLH. I will, however, comment on CLH's collection style, profit recognition, and debt, none of which are a problem for CCP, or so I think. There may be some error in this post, because it relies heavily on memory, and I am disinclined to verify what I write below.

Collection Style. I have a perception that CLH was substantially founded and managed by Americans, and that gave rise to an aggressive debt-collection style that is common in the USA, but in my view, dysfunctional in Australasia. Including the the recently-resigned Anthony Rivas, all previous CEOs were Americans. The proclivity to litigate is part of US business culture, and CLH is known to be quick to litigate compared to the likes of CCP. Comparing itself to CCP would have made it patent that CCP's style was more successful, but changing the nature of the beast is not easily effected. CLH's recent communications mentions this softer-touch subject, but in a euphemistic changes-in-the-market manner, rather than as criticism of its past.

Profit Recognition. The way profits are created in this business substantially relies on managerial subjectivity, and I have always looked at PDL Amortisation relative to Collections as a guide. CCP's ratio was something like 47% for many years, and CLH's was circa 42%. This suggests that CCP was delaying profit recognition to give itself leeway to handle problem periods, of which I approve, and CLH was not. I'll not sully my typing finger by writing about the exceptionally low amortisation/collection ratio of another company in the sector. The problem with Profit Recognition being too generous is that Profit growth often is the basis for huge bonuses. An engineered NPAT improvement sends the SP north, which allows the top nobs to sell, and skip out. This is what I understand happened at CLH in 2015, or thereabouts, and perhaps again recently.

Debt. I do not know what CLH borrows, and from whom, but I understand its debt/equity ratio is high. CLH's arrangement with Balbeck Capital effectively sells debtors ledgers to Balbeck, a private equity firm, at an immediate small profit, and then gets paid a fee for collecting that debt for Balbeck. What selling the debtors ledgers does is generate early profit and early cash in hand – a selling the family silver deal, because private equity companies demand their pound of flesh, which is demanded later.

PS for Applebottom. The problems that CCP had in 2008 may, or may not, have been flushed out by the GFC. The GFC was not the cause of the CCP's problems. The problems arose because of the gung-ho style of earlier management that occasioned a lack of discipline for a few years leading up to 2008. CCP bought PDLs aggressively, but it could not grow its collections team fast enough to collect. There was a palace revolution in late 2008, and a new management team was installed that drastically reduced buying PDLs, and increased focus on collecting on old PDLs, which was a successful strategy. I think the current corona virus problems will pass by quickly, and CCP has the funds to handle a rough calendar year 2020. There may be a problem skulking in a dark corner, but I have thus far failed to find it, and not for the want of sleuthing.