I wondered if CCP may hold back on a guidance in July, but I left the matter in the air, rather than fleshing out that probability with its required ifs, buts, maybes and IMOs. This morning I looked at the posts in the CCP subforum since my post of 19/05/20, add comments on issues mentioned by various posters.
Our unknowns are not unknown to CCP
CCP is dominant in its core business in Australasia, and hence it has close relationships with the main PDL sellers, including having some forward-flow agreements with them. In the USA, CCP is on most of the panels that major PDL sellers have, and it has a close relationships to some sellers, perhaps one or more forward flow agreements with them too. How many of these special relationships CCP has in the USA, I do not know, but even if it were a single digit of five or so, that would allow for a great deal of informal quid-pro-quo communication along the win-win lines of if-you-do-this-we-will-do-that, especially in respect to forward flow agreements. The point is, CCP knows the quantum of funds it wants to deploy, and when, and it knows what quantum of PDLs it can buy that meet its timing preferences and its hurdle rate of return.
Further, CCP knows how its competitors are viewed by sellers, how well funded they are, and in what distracting hassles they are now in. Remember, CCP bought Baycorp from Encore Capital, and they would know a great deal about them, and other major PDL buyers in the USA. Being in the business, CCP can read a great deal more into published financial reports than can we poor mushrooms, who are kept in the dark and fed horse shit.
CCP would know how Coviod-19 is impacting them, and at what rate the impacts are changing for the better. It knows what staffing it requires at what points in time, and how well it is retaining, recruiting and training staff. CCP would know what PDL impairments they intend to take, what adjustments to debt provisioning may be required, if any. CCP would now know with a high level of certainty what is going to be in their usual mid-July EOY report. Although management may not issue the usual forward guidance, it would have a fairly accurate tentative guidance for FY21, and a less accurate set of numbers for FY22 and beyond.
Favourable viewed by PDL sellers
The problems of CLH, PNC, and Panthera are well known, and Baycorp is no longer a competitor, so CCP is now smelling like roses in Australasia. Many USA competitors have spotty compliance records and records of unfavourable judgements against them – that alone is a good story. Further, the only published reports I have read are those of Encore Capital, and they seem to be financially struggling, and they have high debt leverage. Sellers of quality PDLs are attracted to a PDL buyer with a soft-style collection approach that produces good results – they want to see their delinquent clients traced and rehabilitated, not trashed in bankruptcy proceedings.
Impairments and Provisioning
Although impairments and provisioning appear in the statutory accounts, the taxation accounts would be different. The ATO ignores provisions for doubtful debts – it accepts actual write-offs only. Impairment of goodwill, and similar intangibles will also affect statutory NPAT, but the ATO disallows these as expenses. Cash flow is too a significant degree unaffected by these things in the short term. For costs like acquiring Bayorp, the cash has already been spent, so catch-up impairments, relate to the past cash flows. PDL impairments relate to future cash inflow that may not happen. Debt impairment is a mixed bag – some (maybe all), hav already been provisioned by CCP's practice of 20 % up-front provisioning, but ony actual write-offs reduce taxable income.
Both Enron (USA) and Intrum (Sweden) have recorded relatively modest Covid-19 related impairments, so some of us have probably over exaggerated what impairments to expect. It is very much a discretionary matter for management, and CCP's high rate of PDL impairment relative to collections should lessen what a realistic impairment for PDLs should be.
Lending Business
I cannot say why, but I initially thought that CCP may reduce its lending business, now that it is spoilt for choice as to where it can deploy funds. I also remember reading somewhere, but cannot find the source, that CCP was going to reduce advertising for Wallet Wizard, and some poster comment a few months ago that he had noticed that TV advertising had stopped, or perhaps significantly reduced. I do not have a TV, so I must rely on the inputs from other sources to know what is actually happening on the advertising front.
To have investment options, I liked the idea of CCP having options beyond PDLs, and Australasia as a geographic focus. I was not too concerned about plateauing the lending business, provided it remained large enough to justify a viable team without too great a deterioration of the fixed-expense to revenue ratio that could not be counter balanced by reduced advertising. Wallet Wizard is now well recognised in the lending market with strong repeat business, so apart from saving the advertising expense, less aggressive advertising may well be politically apt.
Anyhow, it seems that there is no intention to wind back the Lending business, and the H1FY20 report tells us it is travelling well – to wit, “The consumer lending business reached the milestone of a loan book balance of $230 million, gross of provisions for expected life-of-loan losses. This was due to first-half written loan volumes being up by 14 per cent on the prior corresponding period, including a very strong 8 per cent growth in new customer volume despite the relative maturity of the book. This growth is attributable to the compelling consumer proposition and high brand awareness of the flagship Wallet Wizard cash loan offering.”
CCP shows Loans to Customers as net-of-provisions, and metrics as at 31/12/2019 were:
I used crude methods to tell me that the SP valuation should at least be $15 for me to subscribe to the SSP. In the immediate future I am going to attempt to postulate what metrics we may see for FY20 to FY24, and when I have done that, I'll attempt a valuation that has more supportable facts and reasoning to support guesstimates.
In the current dynamic-for CCP setting, working off a guesstimated EPS for FY20, or FY21 is unsound, because the years that follow cannot be derived by simply adding something like 10% YOY. If one guesstimates what EPS for FY20, or FY21, is going to be, applying a PER to one guesstimated implies a concept of what the future EPS trajectory is going to be, so if the EPS is moving to a new trajectory, one should attempt to get a mental picture of it. Even if that guesstimated trajectory is wrong, one does not solve the problem by having no thoughts on the matter.
For momentum traders, this does not apply – the squiggles on the SP time-series graph suffices for the short term. If one can marry good trading-style timing picks with good fundamental analysis, that is a boon.
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