Kiwoz48
At the end of the day, investors and traders must use their own circumstances and frameworks to decide to buy CCP, or not. I usually register a “hold” for CCP. My current “buy” sentiment reflects that I have bought 4,750 shares recently, and I'll apply for more at $12.50 via the SSP. When the SSP is settled, I''ll revert to “hold” because I do not intend buying more after that. The sentiment registered reflects what I do, not what I think
I'll comment on your post point by point. My response is long (it took all day), so it will have flaws.
Point 1How severe is a recession/depression going to be? Nobody knows, but if you take the combined impact of WW1 and Spanish Flu of 1918-1919, and compare it to what Australasia and the USA (CCP's only markets) are likely to experience in the immediate future, and longer, then what happened to the economy in 1920-1928 is worth considering. Australia and the USA boomed, as did Germany – see
https://en.wikipedia.org/wiki/Golden_Twenties. I think CCP will be back to normal within two years, but I think the SP will rise before then, and my relatively short-term share valuation (and target price) is $20.
How will debtors behave? CCP tends to acquire the better quality PDLs, and 80% of its collections come from debtors who entered agreed repayment plans. I have looked at how collections behaved during the GFC, and I learned that for both Australasia and the USA, collections were fairly sticky, but they did retreat. For the PDL collections, it is the 80% of total collections via repayment plans that are going to make determine what happens. This is significant, so I included a Postscript to focus more on the issue.
New PDLs would be priced to recognise the risk, so they are not a significant issue, IMO, provided they are available to be acquired, and CCP has the capacity to process them. My belief is that CCP will be offered as many PDLs as it can handle. The extra cost of handling more and cheaper PDLs would be recognised in the analytics used to price PDLs. This upfront processing cost, and revisiting it as the debtors change in quality during the life of a PDL, was mentioned by
spider5. In his day that work would have been more laborious. With today's technology, much of this could be customer driven.
Why buy now? The SP reached $40 not long ago, but that was too toppy, so perhaps CCP was worth $30 then, or maybe $35. What would one value CCP now that Covid-19 is on the loose? For me, $20 as a round number is a conservative fair value. I do not need to fine-tune that, because the current SP is under $15, and the SSP price is $12.50. I'll apply for more shares under the SSP, because I believe that I have a greater chance of making $7.50 (using $20 as a near-future SP) than losing $7.50 if the SP drops to $5.00. The upside for me looks better than the down-side. I meant to buy at sub-$7 when one could, but I waited a day too long, and ended up buying 4,000 at $11.09 and 750 at $12.29 just before the SSP was announced. Waiting can be expensive.
Point 2I come from Africa, and I can assure you that nobody in Australia will struggle to pay for their necessities, except those who spend on non-necessities (cigarettes, alcohol, gambling, soft drinks, biscuits, new cars, hair-dos, and many other less obvious things). I have three brothers who are on state pension, and I can assure you that they live well. Folk who welch on debt substantially do so by choice. CCP's debtors on agreed payment plans may stretch out the repayment time due to Covid-19 factors, but that is not a large problem for CCP.
Point 3
CCP's covenants stated he FU19 Annual report:
The Group has a secured loan facility, which is secured by a fixed and floating charge over the assets of a number of entities in the Group. The Group also has a securitised consumer loan warehouse facility which has recourse to the securitised consumer loans.
The secured facility has a limit of $250 million and expires in March 2022 and March 2023. The securitised consumer loan warehouse facility has a limit of $100 million and expires in October 2022 following a two-year availability period and a two-year repayment period.
The secured loan facility requires compliance with various undertakings. These include compliance with minimum Tangible Net Worth (TNW) and maximum Loan to Valuation Ratio (LVR) requirements. The minimum TNW undertaking is set as the greater of $220.4 million and 85 per cent of the TNW at the end of the preceding financial year. The maximum LVR is 60 per cent of the carrying value of PDLs in the consolidated accounts and 50 per cent of the carrying value of eligible non-securitised consumer loans.
The consumer loan warehouse facility has an advance rate of 50 per cent and maintaining this level of gearing requires the securitised loans to meet various loan performance covenants.CCP's target gearing is 25% to $30%, but it rises above that at times because collections are steady, but PDL acquisitions can be lumpy. The capital raising was said to reduce the gearing to 10%, but that headroom will soon be reduced by buying PDLs, and investing in ensuring the collections facility can handle them.
The Loan Book is being reduced by CCP not marketing Wallet Wizard as aggressively as before. CCP only got into unsecured loans to give itself an outlet to deploy its steady cash collections at times when PDLs were expensive, and last year management decided to ramp up acquiring PDLs. CCP's management team know what happened in its gung-ho years leading up to FY2008, and what they had to do to recover, so they are unlikely to invest in PDLs in an undisciplined way.
Point 4The PDLs already acquired in the USA will have their current carrying value impaired to some degree, say 15%. Debtors under agreed repayment plans would tend to be sticky, as Encore Capital experienced in the GFC. So it is the same story as applies to Australasia.
Yet-to-be-acquired PDLs will have the problems now facing the USA factored in to the price that CCP will be prepared to pay. Encore experienced in the GFC that although the collections were below expectation, the PDL carrying value had increased, so collections in FY06 of $US239,340k increased slightly to $US241,402k in FY07, collections remained much the same for FY08, and then they took off significantly in FY08.
In essence, I do not see much difference between the USA and Australasia for CCP for the yet-to-be purchased PDLs. The quality of a new PDL relative to its anticipated quality used to set the price becomes patent soon after purchase, because getting agreed repayment plans commences immediately, and if doing that progresses slower than anticipated, analytic modelling would inform CCP very quickly that it paid too much. The pricing model would then be adapted via that monitoring experience for the PDL acquisitions that follow.
Point 5Processing PDLs to get agreed repayment plans in place is he nub of the issue, IMO, because this must be done quickly, and at a time when established repayment plans may require more attention. Covid-19 would have damaged CCP's ability to do that. These are things that one considers when adjusting the past to get a new share valuation.
Once the pandemic passes, CCP's capacity reverts to normal, and higher unemployment levels would make it easier to hire people for the collection teams. CCP's problems in circa 2008 were substantially caused by insufficient collections staff to handle an increase in PDLs. Current management are painfully aware of that problem, because they were there then, and they would not buy more PDLs than CCP can handle.
I think that CCP has improved its automation to handle user-driven setting, and resetting of agreed payment plans, but I have not looked into it, other than a recent presentation states, “Self-service customer portal delivering 8% of AU/NZ collections”. This will grow quickly, IMO. The recent lock-downs reduced CCP's Manila operation to 60%, Australasia to 75%, and the Utah kept up its capacity by working two shifts to allow staff distancing. The Washington State call centre had just been opened, so its problems had a minor impact.
CCP and many other companies are going to learn from this, and more online systems, more cloud computing, more AI, and more latitude to work remotely are going to flood into the world, much to the consternation of India and the Philippine, where call centres are a significant facet of the economy – see
https://www.thestar.com.my/tech/tec...pends-outsourcing-as-firms-reshore-embrace-ai and similar articles on the Internet.
Point 6I do not think that CCP intends to buy CLH and PNC in the immediate term. One reason is that integrating Baycorp was a significant step, and management may be loath to do something similar so soon. Baycorp had a fairly similar culture to CCP and it offered two complementary facets to CCP's operation – a greater presence in NZ, and a greater level of collections as a service to augment CCP's very limited presence in that field. The Baycorp acquisition has made CCP even more the dominant player in Australasia than it was before, and it may be happy with that. I do not think CLH and PNC have anything useful to offer CCP. They may be more useful as lame ducks to make CCP look good in limited tender requests for PDL bids.
PostscriptGiven a pre-Corvid-19 share valuation of $30, let me demonstrate how sensitive the asset impairment matter is to different levels of default when one considers deriving a current share valuation for CCP.
As per the FY19 Annual report, the balance sheet shows the total value of the Loan Book and PDL carrying value of $586,517,000. It gives the total shares as 54,918,148, to which you must add 12,000,000 new shares ($150m divided by $12.50 is 12m shares). The table below writes off part of the $586,517,000 using various percentages, and reduced it to a per share value. The RHS colums do the same with the total of $685m given the H1FY20 presentation.
............. 30/6/19 based .. P/share ... 31/12/19 based .. P/share
20.00% .. $117,303,400 ... $1.75 .......... $137,000,000 .... $2.05
30.00% .. $175,955,100 ... $2.63 .......... $205,500,000 .... $3.07
50.00% .. $293,258,500 .. $4.38 .......... $342,500,000 .... $5.12
75.00% .. $439,887,750 ... $6.57 .......... $513,750,000 .... $7.68
100.00% $586,517,000 ... $8.76 .......... $685,000,000 .. $10.24
If you start off with a pre-Covid-19 intrinsic share valu of $30, take off $5 on the basis of the above table, and double it to cover other things, you would get (surprise, surprise) my original $20. There is not much purpose calculating a higher intrinsic value if $20 suffices to induce one to take up the SSP offer at $12.50, or even buy at about $15. If such a crude calculation does not incline you to buy, then the crude calculation would need refining, starting with the aptness of the 50% impairment selected, which is high.
As an aside, the H1FY20 Presentation in forms that CCP had PDL repayment arrangements worth $1.4 billion at face value for Australasia. The PDL carrying values as at 31/12/19 was $497.9m.
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