Fear of the Unknown

On 4 August CCP the day CCP released it ‘top of expectations’ 2015 results. On that same day it reached an all time high of $13.58, and then closed down 1.8% at $13.21. One could easily have thought profit taking.  But profit taking alone does not adequately explain why CCP kept on falling and closed today at $8.61, a fall of $4.97 or 36.5%, in less than three months.

Up until the peak 4 August CCP had been widely regarded was a company that ‘kept on delivering’ year after year. That reputation is now in doubt, if not in tatters.

As far as I can tell CCP’s SP has been plagued by nothing more than fears of uncertain factors, and the persistent selling of some US based shareholders.

I believe that completely separate from all of these market contortions CCPs’ actual business is not in any material way suffering and they will deliver on their 2016 numbers.

Fear about Payday Lending and Withdrawal of Westpac’s Banking Facility

This first fear that appears to have smacked the SP took hold on 4 August. On the same day as the results were announced Westpac announced that it was withdrawing from the payday lending sector. Although CCP is not technically a payday lender it is in someways similar and Westpac is its banker. On 6 August CCP, presumably after seeing it share price sliding and assuming there was a link to Westpac’s announcement, said that they did not engage in ‘payday lending’ but did offer loans over periods of less than 4 months.

Cash Converters (CCV) and Money3 (MNY) were two companies directly impacted by this announcement. Bizarrely, CCV’s and MNY’s SPs have been traded in a narrow range since 4 August and have not materially fallen. Why so CCP?

On 23 October CCP announced, following a ‘payday loan’ definition clarification by ASIC (Report 426), that it was withdrawing from the Small Amount Credit Contract (SACC) consumer loan segment. This means that from 1 March 2016 they will no longer offer loans with face values of less than $2,000 with durations of less than one year. They will then be free of any threats directly relating to payday lenders. CCP said in their announcement that SACC’s comprise less than 5% of the carrying value of their total consumer receivables. I conclude that this ‘withdrawal’ is likely to only have a tiny impact on revenues. Note also that if, in future, CCP only write loans with a minimum duration of 12+ months this small ‘loss’ of business would evaporate.

However, the threat that CCP could lose is Westpac banking facilities seems to be clingingon. Surely if CCV and MNY can find other bankers, then so to can CCP! I would like to see CCP make a clearer statement around this perceived threat.

Fear of Additional Capital Entering the Debt Ledger Market

On 28 September 2015, US debt collector Encore Capital Group (NASDAQ: ECPG) announced that it had acquired a 50.25% stake in New Zealand based debt collection company Baycorp. When the transaction was announced Encore’s President and Chief Executive Officer, said "Our vision is that Baycorp will be the number one or two player in Australia ....”. Encore is undoubtedly a substantial international debt collections company, but Baycorp is only a 5^th/6^th ranked player in the Australian market. I have written previously about this transaction and argued that a ‘beefed up’ Baycorp should not materially impact CCP’s business for many years to come.

The market, in particular CCP’s American based shareholders appear to have taken a different point of view.
In the first 4 days of September (the week after the Baycorp announcement) Georgia Division of Investment Services sold an additional 410k CCP shares and as a result of that sale ceased being a substantial CCP shareholder. Note that between June 2013 and Oct 2015 they sold a total 3.5m shares but still held $2.635m.
Between 28 September and 2 October Denver Investments sold 540k shares leaving them with 2.29m.

We do not yet know what Georgia and Denver did next, but I think it is safe to assume both have continued selling and that behavior is a substantial reason behind the fall.

Fear of being caught out by Momentum

Since 4 August average daily trading volumes have been about three times what they were previously and more recently have been five times. Combining this trend with the doggedly falling SP, I conclude that fear is feeding on itself. Momentum is fueling momentum! The market is fearing that something scary is out there which they do not know about; they are afraid of what they do not know, and just to be ‘safe’ others too are selling.

Positives

To date no one has identified anything material that CCP is doing or and material event that justifies the fall in CCP’s SP. This fact gives me reason to be positive about this company and that the SP will rebound shortly and sharply.

The current 2016 FY PE is approx 9 and the dividend yield is 5% making this a great time to buy.

JP Morgan has recently announced that it has retained it‘s Neutral rating for CCP and gave a Target Price of £11.27.

K