Wheres the CCP growth coming from?, page-21

We have thrashed out various aspects of CCP's growth and its business strengths, but I would like to visit two things as a swan song – the significance of Thomas Beregi's management; and growth theorising.

I use “Thomas Beregi”, the CEO, as a proxy for the total management team, including the oversight of Don McLay as Chairman. The turn-around from the 2008 near-death experience was remarkable; it was although management had an epiphany, and clearly saw the strait road of discipline that one has to follow in this business. Thomas joined CCP at the end of the “silly years”, so he witnessed the cause of the problem, experienced the pain of its negative effect, and he was a key player in selecting and applying remedial action that steered CCP to recovery. This experience is, in my opinion, a differentiator between CCP and alternative stocks in the same line of business. I have been interested, but not invested, in CCP since about FY2007. My mistake was to dismiss investing in CCP in FY2009 on the basis of the recorded EPS decline of FY2008, without reading the published reports that would have told me that this was a turn-around stock – a potential multi-bagger.

In theory, NPAT can grow at ROE x (NPAT - Dividends) ÷ NPAT, or put simply, ROE x Retained Earnings Ratio. This is a truism that shifts the problem to knowing what future ROE is going to be, and so for many stocks it is fairly useless and equity dilutions and buy-backs stuff things up too. For all stock it would not hold true for many years unless ROE was relatively low, because the nature of business precludes super profits in the long run. For a disciplined company like CCP that can invest in its Loan Book or in PDLs at a common level of profitability, one could hold that the formula would approximate growth for a few years fairly well, which suggests that CCP 's underlying EPS should grow at about 23% x 50% = 11.5%. EPS for FY2014 was 75.4c, and an 11.5% uplift would be 84c. The forecast is the range 80c to 83c, but CCP usually tends to end up with an EPS very close to the top of its forecast range, or above it, as happened in FY2013.

It is the underlined bit above, and in the shorter term the reservoir effect of both CCP's Loan Book and its PDL inventory, that helps CCP hold its ROE metric fairly steady. The reservoir effect also gives rise to provisioning, and this gives rise to what I call time-shifting, where latent profit can reside in the balance sheet, and be extracted in later accounting periods. Company accountants often reduce reported profit volatility by debiting or crediting provisions, or impairing or appreciating assets (the other side of the same coin).