Ann: Credit Corp Group H1 of 2018 Results Presentation, page-22

In respect to JoeGambler's words, “Slide 7 clearly shows a significant decrease in expected PDL investment in FY18 in Aus. The reasons for this summarised by the company in the presentation, for example the drop in market share due to increased competitor investment.” I remember reading that part of the reason for more competition to buy PDLs sprang from competitors being able to raise capital to fund more purchases.

I make two points below to cover the two sets of underlined words above:

1. CCP's reason for diversifying was mainly to give it options as to where to invest cash, either tactical shifts in the relatively short term, or as a tectonic change of emphasis in the long term. If investing in Australasian PDLs does not meet Management's target profitability, then both increasing the Loan Book or investing in USA PDLs are options. We should not be concerned if the mix of these three options cause short-term switches over time, and if the business substantially changes in the longer run. The important thing is to keep up a rising trajectory of targeted-profitability investments to grow EPS and DPS at a healthy rate, but not faster than the company can change to accommodate the growth. CCP's great disaster of circa 2007 was caused by trying to grow too hastily.
2. On the matter of exaggerating profits, this is not a problem in respect to CCP, in my opinion, but it is a concern I would have if I held alternative stocks in the the PDL-buying sector. Profits are exaggerated by the simple process of valuing the PDLs held in stock too highly, the corollary of which is to lower the PDL amortisation expense. I recall when (FY 2015) CLH was the darling of punters and analysts, its PDL amortisation expense was something like 42% of collections, having steadily declined from about 45%. CCP's ratio was something like 48%. Anyhow, after some senior CLH executives with heaps of shares left the company, and sold out, CLH's performance did not look so good. PDL-purchasing companies do not buy PDLs of exactly the same quality, so comparing their PDL amortisation relative to collections is a questionable indicator of short-term-versus-long-term optimisation of shareholders' value. A desire to raise capital or sell shares would tend to skew the optimisation balance to the short term.

I do not follow PNC, so I do not profess much knowledge of it. PNC professes to buy only quality debtors ledgers, which may, or may not be true relative to CCP. PNC's amortisation of PDLs is roughly a third of the value of collections, which is low, but perhaps justifiable. That is a concern that I would need to investigate were I considering investing in PNC, which I am not.

A second concern is that since 2014 when PNC raised $40.2m via its initial float, there have been two further capital raisings – one in April 2016 to institutional and sophisticated investors of 3,415,031 shares at $1.70 per share to raise gross proceeds of $5,805,552.70, and one in FY2017 to raise $20 million through $15m placement and $5m rights issue. There is also a DRP in place. Morningstar gives the history of share numbers as:

.. 2014 .... 2015 .... 2016 .... 2017
45.2m .. 45.2m .. 49.2m .... 59.0m

In essence, PNC has funded part of its PDL portfolio growth in recent years via capital raising, whereas CCP has funded its PDL portfolio growth for that time via retained profits. In spite of CCP having a relatively high dividend payout ratio, good ROE metrics allow CCP to achieve reasonable growth.

PNC's two founding shareholders, Banksia Capital, a private equity consortium, and Keith John, commenced holding some 30% of PNC's shares after PNC's float in 2014. Banksia Management held about 12 per cent of the company, and Mr John held more than 15 per cent. I found these percentages via the Internet, and they need verification. In fact the 30% mentioned above was stated as 35%, which I made more vague by describing it as “some 30%”. Banksia, I have read, has exited the share register, and Keith John has reduced his holding to just above 10%. My point is that I would be cautious of reported performance when a company is prone to capital raising, or where influential shareholders want to sell shares. Keith John has a long history of building businesses in this sector, and then selling out in total, or in part, so he knows how to present things well. Without doing more research, I feel more comfortable invested long term in CCP than in PNC. If CCP, or somebody else, acquires PNC, and Keith John then floats another listed company in the debt-related sector, his track record suggests that punters getting in early would do well.