Boring is good. Odious is good. Boring and odious is wonderful – it keeps the yuppies from starting up competition. There are very few occupations that are as odious as being a debt collector.
CCPs results were good, but the market anticipated them, so the results had been priced into the SP. Now for Jack-Horner-style bragging – I looked at my research notes, and found that I had assumed EPS would grow by 10% to be 75.4c x 1.1 ≈ 83c, with DPS likely to be 83c x 53% ≈ 44c. Both transpired to be correct. I assumed that FY2016 EPS and DPS would grow by 10% too. Because of the formulaic way that CCP is managed, it is not surprising that revenue too rose by 10%. We will witness much the same for FY2016, I suspect.
In respect to a valuation, I would simply say that a stock like CCP should have a PER of about 15, and that current valuation should be somewhere between the values based on FY2015 and what one can reasonably expect in FY2016 – that is, somewhere between 83c x 15 = $12.45 and 83c x 1.1 x 15 ≈ $13.70. The mid point is $13.075. This is a crude way of valuing CCP, but I have not got the IQ to be more refined. The current SP is about fair value, in my view. Because I would like to hold more CCP, I would not sell unless the SP exceeded my valuation by a large margin. If I could (funds being available), I would top up on significant SP weakness, which periodically happens with CCP.
Had the acquisition of PDLs at prices that met CCP's profit hurdles not been forthcoming in FY2015, and investment funds were diverted to extending CCP's Loan Book by more than occurred, the high provisioning of loans would have lowered statutory NPAT, and hence lowered reported EPS, although the underlying performance would have been the same, presuming that both businesses are equally profitable, as management have said they are.
For now, CCP has two profitable options when it does not acquire PDLs because they are too expensive – it can: a) switch to expanding the Loan Book; and/or b) focus collections on older PDLs. CCP seems to have done both these things during FY2015, and hence in respect to collecting on older PDLs, the words, “The total amount collected from PDLs acquired more than 2 years ago increased by 26 per cent over the prior year.” Older PDLs are a hidden reserve that CCP can use in low-PDL-acquisitions periods to keep its collection teams busy.
The embryonic business in the USA does not cost CCP to be held in developmental dormancy. It could become significant when circumstances in the USA debt collections sector improve. If this occurs, then CCP would have a third investment option during slow PDL-acquisitions periods in Australia– a geographic alternative for investment funds. This geographic option is an important factor for the USA-based Encore Capital, which has looked abroad to compensate for the softness of the USA market. Encore has reported excellent results from its entry to the UK market via the acquisition of Cabot Financial. Let's hope Encore stays away from Australia, or acquires CCP at an obscene price.
In the metrics below the reciprocal of the Amortisation/Collection Percentage is the ratio of what CCP expects to collect over a number of years relative to what it pays for PDLs. CCP makes a fairly steady 23% ROE, and it retains about 47% of NPAT to fund growth, which suggests growth should be about 23% x 47% = 10.8%, which is why I use 10% when extrapolating forward.
Column 1
Column 2
Column 3
Column 4
Column 5
Column 6
0
2015
2014
2013
2012
2011
1
PDL collections
288186
288106
250369
230442
205289
2
PDL amortisation
135721
136242
119451
108439
93127
3
Amortisation/Collection %
47.09%
47.29%
47.71%
47.06%
45.36%
4
Collection factor assumed
2.123
2.115
2.096
2.125
2.204
5
6
EPS – Basic (cents)
83
75.4
69.8
58.4
46.9
7
EPS – Diluted (cents)
83
75.4
69.8
58.4
46.9
8
DPS (cents)
44
40
37
29
20
9
Earnings Retention %
46.99%
46.95%
46.99%
50.34%
57.36%
10
NPAT / revenue
20.00%
20.00%
22.00%
21.00%
19.00%
11
Return on equity
23.00%
23.00%
24.00%
23.00%
22.00%
12
NTA per share (cents)
387.3
344.1
302.6
265.9
229
CCP Price at posting:
$13.21 Sentiment: Hold Disclosure: Held
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