What's next, page-31

Hi Pioupiou

I greatly appreciate your thoughtful posts. A few comments:

Mr Market is not currently so much ‘shallow-witted’ fellow as is is an anxious and unusually temperamental ‘cat’ (AKA “Mr Cat”) which is poised to strike and will strike again and again if provoked. Over the last couple of months Mr Cat’s claws have ripping into what were relatively stable shares prices.


I think we can squarely, and probably should, blame China’s Political and economic mismanagement for the emergence of this malformed market slashing Cat. Over and above everything else, it is China’s failings which are causing the market to ignore CCP strong fundamentals: NPAT, EPS, dividends etc. This is the heart of investors dilemmas. (I can give you chapter and verse on what their recent ‘mistakes’ have been and what their ongoing Herculean challenges are.)

I appreciate that CCP’s has a strong tradition of providing conservative initial guidance and later, as the year goes by, trouncing these numbers. I also that this pattern will continue, but to a lesser extent, this year. This year CCP will find it more difficult to collect debts in what is now a ‘non-so-buoyant’ almost recessed economy. We should therefore moderate our overall expectations for this year and next and look more specifically as to where we expect the above guidance results to come from.

After tweaking a few assumptions my modelling for 2016 and 2017 suggests the following:

1. Overall 2016 EPS will be 92c and 2017 99c. I note that my 92c is one cent higher than CCP’s upper guidance figure of 91c.
2. I expect that there will be little or even no revenue or profit growth in the PDL business this year.
3. Virtually all current year profit growth will come from the consumer lending book. It is very fortunate that this business was started a couple of years ago and is now ready to produce some decent profits. If my assumptions are reasonable the loan book will generate a PBT of $4.2m in 1H and $10.9m over the whole year.
4. Last year CCP’s bank debt rose by $26m from $38m $64m. This money was used to grow the loan book, while maintaining ledger purchases at a relatively high level. If CCP sticks to their initial 2016 guidance this bank debt will fall by about $20m. Given that they are not likely to be quite that conservative, it seems to me that they have built a small cushion into their guidance, which they will use. As the loan book is where the bulk of incremental profits are coming from, it would be better if any above guidance borrowings were used to fund this business. I do not think CCP will want to push up their debt balance beyond last year’s closing figure, so Pioupiou to me your suggestion of +$180m ($120m + $40m ???) is a little too high, and your projection of $220m is much too high 2017.
5. I think in the current economic climate a PER of 15-16 is out of the question. There is simply too much global anxiety over the state of the world economy (especially China) and Australia’s exposure to that very opaque and uncertain country. Given the current economic climate and market anxieties a PER of 13-14 seems much more likely. Assuming, always assuming, that all of the above reasoning is about right, the SP should be trading between $12 and $13, about 10% above where we are now.

Cheers
K