I would like to comment on two things that you wrote.
Using the money to not only shore up balance sheet but also expand if an opportunity arisesIMO, your words dilute the message that I extract from the CR intention. It is not, IMO, a matter of opportunities that may arise – the opportunities have arisen, and they are patent to Management.
- In Australasia, PNC and CLH are in trouble, Baycorp is now within the CCP fold, and small non-listed PDL players like Planthera are either in trouble, or insignificant. CCP can probably buy as many PDLs it wants that suit its target profitability and target quality. The limiting factors would be funding and collections capacity. There is a nexus between funding and collections capacity – funds devoted to the latter detract from funds available to buy PDLs, and CCP wants to do both concurrently.
- The difference between Australasia and the USA is CCP's percentage of the respective sectors. The favourable factors in the USA may be diluted relative to Australasia, but in absolute dollar terms, the USA would be a larger opportunity than Australasia. Also, building up collections capacity in the USA would require more effort, but now is the time for CCP to do that.
- There would, if CCP is interested, be ample opportunity to acquire the PDLs now held by stressed competitors, which is what CCP has periodically done before – think of the acquisition of NCML from TGA (Thorn Group) a few years ago, where the business was acquired at about the value to CCP of the PDL assets.
- I'll not bother to give thought to the Lending business, but I suspect that there will be sufficient opportunity there for Management to decide on the optimal deployment of funds there. This may be just sufficient to keep the business viable.
The words, “shoring up the balance sheet” are empty words without qualifying why the balance sheet should be shored up. The words could imply that part of the reason is survival, which it is not, IMO. CCP has a strong balance sheet, and it can survive by run-off of PDls and the Loan Book. CCP wants the money (as opposed to needing it) for the reasons advanced above.
From a funds perspective, there is nothing gained in CCP's case to separate cash and bank-finance headroom. The bank-finance facilities are backed by near-to-mid-term cash inflows from PDLs and Loans. CCP draws money in a lumpy way to finance the acquisition of PDLs, and sometimes businesses, whereas the cash inflow is constant and predictable. The CR funds would simply be tipped into the same bucket to reduce interest payments, and funds would be drawn from the banking facilities. Consequently, the CR simply gives CCP more funding, If that funding is deployed into more quality PDLs, or quality loans, that reduces the funding headroom in a direct sense, but increases it from by increasing the collateral. If there are dollar caps on the current two loan facilities, but raising them in a different collateral setting would be a trivial negotiation, IMO.
Gut feelingI have always had a gut feeling that CCP would soon get to $20, and I have mentioned it a number of times, and stated that I had no need to have it any higher to justify the 4,750 shares I have bought prior to the CR Announcement, and to apply for more at $12.50 each. It did not seem to great a leap in faith to suggest $25, but I had no need to do that. Now to the sweet notion that I have in mind – that is about $35, but I would not be inclined to put a date on it, other than suggesting within two to three years. The simplest way to flesh out that gut feeling is to invent a viable EPS trajectory, and depending on its slope, and EPS, and,
voila, one has a crude target price with a time frame.
One can only usefully extrapolate the following EPS trajectory if one knows the history for recent years. CCP commenced two initiatives in that time, the Lending business and the USA business, both were EPS drags. During that time, easy money allowed competitors to outbid CCP for PDLs, also, up-front provisioning of the Loan Book depresses EPS when the Loan Book grew relatively quickly.
.. .. .. FY10 - FY11 - FY12 - FY13 - FY14 - FY15 - FY16 - FY17 - FY18 - FY19
EPS .. 30.3 ... 46.9 ... 58.4 .... 69.8 .... 75.4 ... 83.0 ... 97.0 .. 114.7 .. 133.7 .. 141.2
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