I did not go back to have a second look at Encore Capital. I got side-tracked looking into Intrum Justitia in Europe (based in Sweden, so values are in Swedish Kroner, millions). For Q1 2020 see. https://www.intrum.com/investors/reports-presentations/presentation-of-results/. I am suspicious of both Encore's and Intrum's relatively benign view of the Coviod-19 impact, but partly because at CCP's current SP, I can afford to be pessimistic, and still hold the shares that I have, and apply for more via the SSP.
Intrum operates in many European countries, and in general the Covid-19 pandemic has had a more negative impact in Southern Europe (Greece, Italy and Spain). I only looked at its Portfolio Investment business, which is similar to CCP's business in the USA, and to a lesser, but significant, degree CCP's business in Australasia. Below are snatches of some words from the Q1 report to add flavour to the numerics that follow it.
The market for our services is growing. With digitisation, credit sales are increasing, the market is being consolidated and new types of receivables are being sold as companies and banks seek to focus more on their core operations. [The same story should apply to CCP].
85 per cent of our collections in the portfolio investment segment being generated via automated and online payments. [It is 80% for CCP].
The portfolio revaluations correspond to approximately 2 per cent of our book value and reflect our expectation of lower collections during 2020. [The actual calculated metric is 1.75%].
For March, the collection in our portfolios corresponded to 100 percent compared to our active forecast, and for April we collected on the same level as last year, which is in line with the revaluation forecast. [In effect, Q1 2020 was not impacted. The Q1 report was published in May, and the Covid-19 affect had by then become patent].
For Intrum, the impact of the crisis is primarily a delay in collections and cash flows. [The money is not lost – it is delayed, and some may be lost].
This should allow us to return to normalised levels of activity and productivity by the fourth quarter. [October-December 2020].
With an organisation that retains its target focus, a strong business model and a stable financial position, I see excellent prospects for Intrum’s long-term development as the leading player in Europe, based on greater business volumes from the latter part of 2020 and the years ahead. [CCP's outlook should be optimistic too, perhaps more optimistic]. Normalisation during the fourth quarter. Intrum has closely followed the spread of Covid-19 and we have adapted our operations to the prevailing conditions. A majority of our approximately 10,000 employees have been working directly in our production systems from home since mid-March, which means that we can continue to manage our business volumes even if productivity is partially affected.
The take-away from the following is that CCP amortises PDLs more aggressively than Intrum, and in loose terms, the Covid-19 related impairment for CCP should be about 20 to 25% of collections. It was a bit lower than 20% for Encore. I did not delve into things like debt levels, but CCP probably compares favourable relative to Intrum.
Here are some metrics Q1 Intrum metrics in Swedish Kroner millions. Note the amortisation of 40.55% of collections (lower than for CCP, but higher than Encore). Also, note the 22.85% of QI collections to derive a PDL impairment, and be aware how much higher percentage I use later when considering CCP using a guesstimated quarter year.
Carrying value portfolio investments .. 36297
Portfolio revaluations ...... ..... .... ... ... ... -636 ... 1.75% of carrying value
if we decide to guesstimate CCP's Covid-19-related impairment as a percentage of CCP's PDL carrying value, then based on CCP's H1FY20 of about $500m, 2% of carrying value would be about $10m, which divided by 67m shares is about 15c. Intrum has impaired for only one year, and as CCP tends to collect a third of its collections in 1 year, we could assume that if CCP applied impairment over the entire collections life cycle, the 15c per share would grow to 50c per share. This seems rediculously low, and the low amortisation rate (hence higher PDL asset value in part contributes to this), so let's use a 25% of Collections-per-quarter approach.
CCPs collections for 1HFY20 were $236,415K, so assume $120K for a quarter. 25% of that is $30m impairment for collections in calendar year 2020. If CCP decided to impair for the life of the collections, that would be roughly $100m. Divided by 67m shares gives $100/67 ≈ $1.50. This is for PDL impairment only, I think one is going to have to stretch the imagination beyond credulity to reduce share value by $10 from some reasonable ante-Covid19 share value. That inclines me to think my stab-in-the dark post-Covid19 value of $20 is too low, but I see no reason to bump up the $20 now, because I cannot sell for $20, and I can buy via the SSP at $12.50.
Anyhow, CCP is sure to issue another guidance some time, and that should inform us better than my arithmetic convolutions.
CCP Price at posting:
$13.74 Sentiment: Buy Disclosure: Held
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