In the past, CCP's SP has retreated because two large US shareholders sold down, perhaps exited. This was a welcome opportunity to buy in, and it had nought to do with CCP's business performance and dividend yield.
Recently, the sudden turn for the worse of CLH's prospects has been interpreted by some to indicate a negative macro environment facing the debt-collection sector. Personally, I do not see it that way, and I think, but do not know for sure, that upward manipulation of CLH's NPAT in earlier years may be the culprit – CLH's amortisation of PDLs was lower than CCP's, so perhaps future year's profitability was sacrificed to give better recent years' profits, which helped increase the share price, aided by the enthusiasm for CLH of Motley Fool and others, and FY2016 is CLH's year of reckoning. It is very easy to manipulate NPAT in this specific sector, because nearly half the COGS is PDL amortisation – a very subjective metric. CLH's poor collections metric relative to PDL assets may relate more to the fact that the assets are overvalued, rather than some macro issue with collections.
On the matter of CCP's use of its line of credit, investing in PDLs is an opportunistic matter – sometimes they can be bought at attractive prices, and sometimes not, plus sometimes a tranche of PDLs at attractive prices can be offered to CCP out of the blue. CCP's policy is not to hang on to a large war chest to invest in PDLs in this changing scenario – it uses its balance sheet strength, its prodigious cash flow, and its profitability to justify a line of credit to handle peak PDL investment loads. The 2015 Annual Report articulates it thus, “Credit Corp maintains a banking facility of $75 million which provides it with flexibility to fund short-term fluctuations in purchasing volumes without the need to dilute returns by holding large amounts of cash. The facility may also be applied to growth in consumer lending. In 2015, the company produced a Return on Equity (ROE) of over 20 per cent, which exceeded its required rate of return. This return was achieved with modest levels of gearing, representing a low level of financial risk for investors.” An increase in the use of the banking facility can be the harbinger of good news for future years collections if the funds are well deployed.
If Donald McLay, the Chairman, has been buying recently, which is the case, I assume that CCP's SP is undervalued – he has in recent years bought on the dips and sold on the highs, while always retaining a large core holding.
CCP will issue a guidance update in late April or in May – the last for FY2016. The relative update for the past three years were, 30 April 2015, 21 May 2014 and 16 May 2013.
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