Not so much bad news as a fairly thinly traded stock. Feel for those of you getting caught out this morning getting caught with orders on short volume. The last couple of days the order book dried up completely, looks like people propping both sides to create a trading range withdrawing around the announcement date.
An ok result on the face of it, but H2 will be telling. I still see value in this and personally agree that circa $2.05-2.1 would appear to be a highly supportable valuation and at a discount (PE etc.) to competitors (lack of volume and market cap [under $150m] having an impact?).
Cash receipts from customers continue to grow with $28.9m received in the half, with $1.4m coming from portfolios sold (presumably similar to prior sales of Part IX customers where NPV +ve to sell vs hold and collect). Therefore $27.4m in the current half from customers that fit the annuity collection model. This is around a 19% increase in H1 16, on a like for like basis, compared to H1 15($23.2m). Not a bad increase in cash collections, but is it enough to hit the market guidance of $8.8m after tax for the full year? There is seasonality in cash flows as new purchases start to yield in the second half, so (hopefully) should be so ...
An area worthy of closer inspection and of interest (other than underlying cash flow and liquidity) is the portfolio valuation. The average valuation of the portfolio for H1 16 was $89m vs H1 15 of $64m, an increase of 39%. This would indicate that underlying increases in cash receipts (19%) have been outstripped by fair value growth. This doesn't necessarily indicate an issue depending on what is driving the growth in valuation but does warrant looking closer to ensure we understand it. Over a long term horizon revenue will equal cash (cash received from customers less cash paid on acquiring debts), in the interim revenue is derived from fair value changes which makes estimates about how these future cash flows will pan out, along with how the current period went compared to predictions. Positively this valuation increase could indicate that recent history is suggesting improved collections over past estimates, which is flowing through to estimates surrounding collections in the future. Note 5d in the financials supports this notion with actual cash flows exceeding estimated for the current period by $4m (although it is hard to know the exact make up of this number from what is disclosed). Also page 17 of the investor presentation indicates a very low default rate for PAs; this combined with PAs totaling $150m ($27m or 20% increase in the half) is a positive sign, but not much upside risk in defaults and a fair bit of downside risk in adverse market conditions. The total portfolio is valued at $89m with a PA book of $150m - that's 59 cents in the dollar with a 3% default rate....and that excludes the remainder of the portfolio that may not have been worked or has the potential to be worked harder to collect. Valuation ($89m) over face value of the portfolio ($1,013m) is circa 8.8 cents in the dollar. Overall the company would appear to be trading on a PE circa 12 x based on 2 x HY result, but based on investor preso P18 cash receipts tend to be greater in H2 (presumably new purchases developing into cash flows) and assuming at least market guidance is met, which appears somewhat achievable, a PE of 9.1 x.
Interest rates are currently low and a headwind/risk if interest rates go up. Possibly not a likely scenario at present, but worth bearing in mind. Covenants are stated to have been be met and the maturity profile appears ok with only $7m due in the next 12 months. Given the business model and the current dividend payout ratio, Pioneer is likely to maintain a reasonable gearing level and thus it is important they manage their asset/liability matching appropriately and maintain some buffer in case default rates increase (aka dividend policy). There appears to be still available funding for further acquisitions of portfolios using debt ($16m available, due to increases in the facility - p14 & 24 financials) this year, at least when combined with free cash flow. However, beyond this point one has to wonder whether the book will be kept at a similar size or whether a capital raising is required for growth....all I say on that is that hopefully any raising is at a good price and does not dilute existing shareholders under intrinsic value.
It will be interesting to see whether the new products to be introduced in 2016 will be value accretive or not and how they are received. Looking at retail banks, credit cards tend to be the only place they incur significant provisions (as a proportion of the book) and Pioneer doesn't appear to be taking this risk directly and sheltering it in its equity investment in GMY, so other than infrastructure one would have to think this presents a good opportunity.
Even being conservative still think this is worth upto 15-25% upside to a target of $2.05-2.25, but this may need time to realize, given size and trading volumes. Enjoy the DRP in the meantime.
Just my rambling thoughts. DYOR most of us are right only right occasionally. Don't lose big when you're wrong.
PNC Price at posting:
$1.79 Sentiment: Buy Disclosure: Held
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