CCP (ASX) Dodgy trading

Originally posted by Pioupiou: ↑

Plimsoll

I had a glance at Encore Capitals report for the nine months ended 30/09/2023. Superficially, it seems that Encore had a bad stint too. The Presentation is at https://encorecapital.gcs-web.com/static-files/ece17093-258b-45a4-93ee-f7e7e1a1b8fa.For the nine months ending 30 September, comparative metrics for 2023 and 2022 are:

–––––––––––––– 2023 ––––– 2022
Net income –– $31,494 –– $267,682

Earnings per share:
Basic ––––––––– $1.31 –––– $11.00
Diluted ––––––––$1.22 –––– $10.06

Encore did not dwell on the EPS decline, because it tends to focus on the longer-than-a-year performance, on the basis that the sector is cyclical by nature – good collections years are bad PDL buying years, and vice versa. Encore limits buying PDLs in the bad buying years, and buys up big in the good buying years. Also, Encore regards the life of a PDL to be ten years. Whereas CCP uses six years. Like many USA listed companies, Encore does not pay dividends, but it buys back its own stock, so investors must look to capital gains to get a return. I do not know the impact of a buyback policy on the SP.

In contrast to Encore, CCP pays circa half its net profit as dividends, so if its EPS slumps, the dividend per shares does too. This difference with Encore may incline CCP shareholders and potential shareholders to be more focused on short-term performance. Further, CCP's Management are ultra-quick to announce problems, and if possible impair the balance sheet, which makes sense from a business perspective (delays taxation, for instance), but Mr Market does not look through the cycles, and neither does Management encourage them to do so.

Layered on top of this difference between Encore and CCP, there are unique-to-CCP factors in respect to staffing, and the timing of PDL purchases. CCP, I think, was desperate to elbow its way into the US PDL market as a viable buyer of PDLs, and it seems to have bought on a large scale too early, relative to Encore's buying spree a year later, and relative to staff numbers to collect on the PDLs. CCP's buying was attended by a staffing shortage to collect the debt – the same problem that nearly sent CCP to the wall in 2009. I am surprised that Management repeated the mistake circa a dozen years later.

In concept how Encore and CCP write down PDL values are similar in that they are driven by similar accounting standards based on expected credit losses assumed for each reporting period. In effect, Management has latitude to make these assumptions, which can distort reported performance in any one period. Encore refers to the accounting standard as Current Expected Credit Losses (CECL). I think CCP refers to it as Fair Value. The Australian Accounting Standards Board makes Accounting Standard AASB 13 Fair Value Measurement under section 334 of the Corporations Act 2001.

What I think CCP does is that it sets what it thinks it is going to collect when it buys a PDL, and it calculates the percentage of collections that would reduce the asset value over a six-year life to zero. If things transpire to look better, CCP does nothing, and simply books excess revenue without amortisation expense, which delays the profit recognition. If things transpire to look worse, CCP makes an immediate impairment, and if it's non-trivial, it puts out an Announcement, thus creating bad news for ever-hungry news mongers. In contrast, Encore decides what to write off each year as a routine, and makes little noise about it.

These are just comments. I have made no attempt to delve into the issues and to revalue CCP's share value (value, not price). For traders, it is the current zeitgeist that counts, not a reasoned valuation, and anticipating market mood accurately can be profitable. On the herd like mentality of the Market, a ridiculous analysis by Checkmate Research in 2018 sent CCP's SP into such a downward spiral that Management called for a trading halt – see https://www.copyright link/companies/financial-services/credit-corp-gets-on-front-foot-after-research-attack-20180621-h11ob7.

These are just comments. I have made no attempt to delve into the issues and to revalue CCP's share value (value, not price).

Expand

The story goes Ccp signed agreements and then bad debts increased more than they expected in the US, CCP was therefore contracted to buy a bunch of extra US PDLs in a worsening collections environment, thats what triggered the write down.

No.	Vol.	Price($)
1	1500	$12.85

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3	1609	12.830
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(20min delay)
Last $12.91		Change -0.180(1.38%)		Mkt cap ! $878.7M

Open	High	Low	Value	Volume
$13.01	$13.07	$12.85	$3.840M	296.6K

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