Fear of the Unknown, page-7

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I doubt if CCP has a significant moat, unless one regards good management as a rare commodity, which is a fact. CCP has good management that is conservative in its accounting treatment and use of debt, which differentiates it from its competitors. The differential can be evidenced by various published metrics – PDL amortisation, debt leverage, ROE and others. Management can, however, move, so that is a risk one should hold in mind.

CCP is the largest player in a slow market sector, so it will not perform as well in the future as it did since its 2008 low point (caused by a different management team). CCP's ROE of 23% and its Earnings Retention Ratio (ERR) of 47% suggest its NPAT can grow at about 10% for a few years. ROE x ERR = 23% x 47% = 12%, which I rounded to 10% to recognise that growth is slowing. The best perspective of future growth can be drawn from the Long Term Incentive (LTI) component of management remuneration – on which the Annual Report states:

“Over the three years of the LTI, the benchmark earnings each year represent a compound average growth rate (CAGR) of 11 per cent in NPAT. This level of earnings growth needed to be exceeded for an LTI pool to be created.

It is the view of the Remuneration Committee and the Board that an LTI hurdle based on exceeding a CAGR in NPAT of 11 per cent over a three-year period is a challenging objective for executives due to:

1) Constraints on the ability to grow the core Australian debt buying business of the Company.

• The Company has the largest market share in its core business of domestic purchasing and collecting past due unsecured consumer receivables. Competition has intensified with recent equity raisings and favourable debt refinancings by competitors, increasing the capital available to the sector and resulting in higher prices and lower returns.

• There is no structural growth in the supply of PDLs as a result of no real growth in unsecured consumer credit levels in Australia and static levels of delinquency over recent years.

• A concentrated banking system results in only a few significant sellers of debt, which means that market share cannot be entrenched and competition between sellers is strongly promoted.

2) The need to continue to invest in new strategic initiatives to drive growth, given the constrained prospects for growth in the core business.

• The two main strategic growth initiatives the Company has pursued in recent years are the development of a domestic consumer lending business focussed on providing lending products for credit-impaired consumers and geographic diversification with the development of a US debt buying and collection business. The US debt buying and collection business has recorded losses to date, however the consumer lending business has recorded a modest inaugural profit in the 2015 year.

The Remuneration Committee and the Board consider that the 15 per cent ROE hurdle and the LTI pool cap of $2.5 million per annum under the 2013 to 2015 LTI is appropriate. Management is tasked to maximise earnings growth subject to achievement of this rate of return and the conservative risk appetite and financial structure set by the Board”