JoeGambler My point was not so much to derive a plausible...

JoeGambler

My point was not so much to derive a plausible valuation, but rather to supply information and thoughts investors should consider, and in the process focus my own mind on the matter. In fact the $20 was sucked out of the air, and was mentioned in previous posts. I could have simply felt that $35 was a fair valuation to start , but too high taking in the Covid-19 affect, and $7 was patently too low, and hence picking a midpoint of (35+7)/2 = 21 was reasonable, rounded to $20 to disabuse my mind that the methodology was rigorous. I called that price a valuation, but my buying price would be lower, maybe $15.

We could take the lazy path, and simply assume that if institutions were quick to subscribe at $12.50, and retail shareholders expecting the SSP will be over subscibed, then we could pick a valuation slightly higher than $12.50. Bingo - good valuation completed in seconds. All the rest is like debating how many angels can dance on the head of a pin.

When I had finished creating that table that I provided, I used my midpoint-cum-rounding approach to pick $5, and tossed in another $5 to take in factors unconnected with asset impairment. The impairment may be too large, and the other factors too low, so the $10 seemed OK, but let's again look at impairment again and the “other factors”.

Impairment – Loan Book

CCP tends to over amortise, IMO, and hence undervalue the assets. It impairs the Loan Book upfront by 20%, which depresses NPAT when the Loan Book is growing, and the reverse when it is being run down. Added to that, if CCP cut s advertising and rejects riskier applications, that makes the near-future profitability even higher, and the quality of the loan Book better. By offering unsecured loans at the lowest interest, CCP can choose the better quality borrowers. Rejecting 80% of applications, and probably having a long history of doing business with many of the borrowers, further losses not covered by the upfront provisioning, should be small – maybe 10% would be generous. By adding the Loan Book and the PDL carrying value together, I have, significantly IMO, exaggerated the impairment of the Loan Book.

Impairment – PDL carrying value

For the PDL carrying value, 50% impairment may be more realistic, but even that may be too high, but plausible for statutory accounting purposes. CCP can probably get away with that impairment expense for taxation purposes, and hence improve cash flow by lowering tax in FY2020, and only reverse the impairments supported by collections when they occur. The ATO does not treat PDLs as debtors, it treats them as financial instruments. Except for the tax and dividend advantages, impairment has no effect on cash flow, so CCP may as well impair generously. For any given NPAT and dividend payout ratio, a lower NPAT lowers the dividend, and hence improves cash flow too.

Other expense factors

I think the -$5 per share that I ascribed to impairment is too high. Which leaves us with the other -$5 that I invented. All large debt buyers work very closely with sellers, so CCP has a fair idea what the sellers want CCP to take in the near future, and if the growth is to come from the USA, CCP may have to ramp up the water-treading Washington State call centre quickly, and it may have to increase, the Utah call centre too. Further, there may be technological investments requiring extra funds to increase automation - some of which will be expnsed, and some capitalised. I have no feel for what these expenses total, but $5m is probably low.

Rejig components of fair value guesstimate

If one sums a pair of new guesstimates, that $10 per share originally used could easily be $15, and hence my $30-$10 becomes $30-15= $15. Further, it is actually incorrect to take an ante-Covid-19 fair share value of $35, and reduce it by $5 to be conservative, and then factor in the unknown Covid-19 effect. For me, because I believe the fair value was $35, it makes more sense to use it, and increase a conservative factor into the Covid-19 adjustment, so I could end up with my original $20 fair value via $35-$15.

Picking a single number like $20, or $15 is also illogical, because we should think in terms of a spectrum, and pick three numbers, a realistic low, a realistic high and a most probable. So for me it could be $35-20 = $15, $35-10 = $25, and $20 in the middle. I only need an upside-versus-downside reason to apply for shares at $12.50. One can assume that the bods who decided to subscribed for the $120m institutional placement thought in similar vein – they would buy to make a profit, and they would know that a loss is possible.

Nobody can actually know what is going to happen, but insiders would know more than we mushrooms, and they have the benefit of sophisticated analytics, rather than Pioupiou-style thumb sucking.

Asset-return Approach

I am disinclined to use asset-return as a basis for deriving a valuation in a situation that is not in a steady state. CCP is concurrently lurching into the USA market, and handling the aftermath of Covid-19. If CCP over impairs assets, that stuffs things around. New technology may change productivity per employee dramatically, and I expect that can be introduced quickly enough to make a difference to FY21's profitability. The rebalance to more PDL business and bringing the USA up to critical volumes should have a positive affect. The truth is, I did not think of the asset-return valuation methodology.