Thanks for your excellent post, and I substantially concur. There is little to be gained by dwelling on our points of similar thinking, so I'll mainly focus on points of difference.
. . . read the 2019 CCP's annual report which I intend to do soon.
The FY19 AR makes more sense if one knows what has been stated before. Attempt to read earlier Annual Reports, especially since FY2008. You will then appreciate how forward thinking and disciplined the current management has been, in contrast to competitors who focused on the immediate future, and this has put many competitors under financial stress.
. . . and the real economy shows . . . . . . more mature than it was in the GFC . . . real economy/real GDP is destroyed and the market has not reflected that yet
CCP is a poverty stock – CCP's fortunes are not going to run in equal step to other sectors of the economy. Also, don't ascribe a causal link between the timing of the GFC and CCP's difficulties from FY2008 to FY2010. That is the hoary post hoc ergo propter hoc fallacy. The years leading up to FY2007 were CCP's years of immaturity, and the SP dropped to 50c, but by FY2008 the current Chairman and the current CEO took control, and they steered the company out of the mess.
Banks are going to sell debt really cheap as they try to focus . . .
For CCP, it is more the fact that PDLs can be bought in volume at prices CCP thinks are apt. In recent years CCP has had to reduce buying because of elevated prices. CCP does not attempt to buy PDLs at distressed prices – it calculates what it wants to make, and that sets the price. The reason is that CCP wants to develop long-term relationships with the banks, and encourage them to look favourably to CCP as a buyer at a fair price. I think this long-term thinking is the reason why in relatively recent times (since FY19) banks have been approaching CCP to buy PDLs, rather than CCP doing the chasing. I have often seen the words CCP uses to describe its PDL pricing policy, but I could not find those words last night.
With the lowering of debt using equity from the CR we will see a decrease in ROE
True in theory, but in practice it is debt leverage that destroys companies. CCP uses credit facilities to handle the mismatch between the steady inflow of collections and the lumpy outflow of PDL purchases, especially PDLs that become available opportunistically. It is the undisciplined use of debt that has occasioned so much pain for CCP's competitors.
Legislation might change . . . put a halt to strenuous collection . . .
I doubt if any legislation will be introduced that would interfere with the way CCP collects debt. It is CCP's soft approach to collecting debt seems to be the reason why banks are turning to CCP to skip-trace and collect from bank clients who have defaulted. I notice that you wrote “might” and that suggests low probability.
ATO impairment on doubtful debt . . . doubtful debts fall under . . . expense
Statutory accounting is the way companies must report to shareholders, and doubtful debt provisions exist for that purpose. However, the ATO ignores that expense, and entertainment, goodwill impairment and a few other items of expense. That is one reasons why one sees tax at a different percentage of NPAT than 30%. Sometimes tax authorities inflate an expense like export promotion.
. . . use this opportunity . . . to book large impairments
Management could seize the opportunity to make FY20 a really bad year, and blame it on Covid-19. CCP likes to preserve its image as an honest company, so rather than exaggerating, management may simply reflect what they think is apt, which may be on the pessimistic side. Exaggeration occurs more frequently when there is a change of management, because the new management can blame previous management, and set themselves up for an easy run a year later (with a nice performance bonus, of course). When valuing a stock one should look through one-off events, and not extrapolate them into future years. If a company on a PER of say 12 has a $10m lopped off NPAT by a black-swan event, and because it has 10m shares, EPS drops by 100c, then an investor should reduce the SP by about $1.00, or a bit more to account for collateral damage, but not by 100c x 12 = $12.00.
If CCP needed the funds to merely survive, that would not make the investment in CCP as exciting as I now view it. This capital raising is not a survival tactic, it is to support an expansion strategy that is appropriate to execute now, rather than a few years ago,or a few years hence.
CCP substantially survived a near-death experience by a PDL run-off in FY08 and F09. CCP can do that again in the Covid-19 setting, but it prefers to grab the chance to expand. The desire to expand has has existed for some years, and the chance to do so emerged a year ago. That is why CCP raised capital then, and pushed ahead to expand in the USA, and in respect to Australasia, CCP bought Baycorp for $65m. That acquisition may have been opportunistic, rather than known before the earlier capital raising. Covid-19 has, IMO, simply created a scenario where expansion can be significantly accelerated, because CCP is in a better position to respond to increased PDL supply than its competitors can.
Not only can CCP make money from newly-acquired PDLs, it can forge long-term relationships with US sellers quickly, rather than building them up over many years. CCP is going to look back on Covid-19 as a great boon, IMO.
The SPP Announcement states:
The main objective of the raising is to position the company to continue to provide sustainable debt purchasing services and realise future opportunities in all markets
The company has entered this uncertain period with a strong balance sheet but the raising is required to allow the company to manage through a significant downturn without putting its businesses into run-off for a prolonged period.
CCP Price at posting:
$16.05 Sentiment: Buy Disclosure: Held
(20min delay)