Canaccord Genuity estimates the investable market for debt ledgers in Australia is around $440m and around 80% of this will originate with the four major banks, GE Money and Telstra. As a result, unsecured personal loan and credit card balances represent the overwhelming majority of debt purchased in Australia in FY17. [GE Money has been rolled into an entity called Latitude Financial Services – the firm behind many credit platforms used by retailers – one would expect that in the interest of credibility, authors of such material would to get their facts up to date]
The broker notes Credit Corp ((CCP)) is the largest purchaser of debt ledgers and has been able to expand its annual purchases consistently while maintaining the quality of its balance sheet. A Buy rating and $19.42 target kicks of [off] the coverage of the stock.
Collection House ((CLH)) is likely to be the third largest purchaser this year. The company downgraded in FY16 and a reduction in purchasing activity was noted for the second year running. Management changes provide the opportunity to re-position the business, Canaccord Genuity believes and may also mean some near-term write downs. The broker initiates with a Sell rating and $1.06 target.
Pioneer Credit ((PNC)) listed on ASX in 2014 and is in the early stages of growth with a significant increase in ledger investments, which the broker observes have only just begun to be outpaced by annual cash collections. Canaccord Genuity initiates with a Hold rating and $1.85 target.
I have opined before that the PDL-collection business allows profitability for a number of years to be manipulated by under amortising PDLs, and hence the ethics and motivation of management is a crucial factor when investing in such stocks. This inclines me to favour CCP, other things being equal, which they are not. If PDL amortisation is less than 47% of cash collected, then unless there is evidence supporting the low amortisation, be very suspicious – correcting adjustments may follow a few years later. CCP's historical amortisation-to-collections ratio is about 47%. A few percentage points lower is significant over a few years.
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