Klog I am sorry that I cannot answer your questions, but I...

Klog

I am sorry that I cannot answer your questions, but I suggest that comparing debt-collecting firms is difficult – perhaps impossible. Firstly, they differ in the mix of engines they use to generate profits; secondly, the quality of debt they buy varies; thirdly, their accounting conventions differ, especially the valuation of older PDLs (all PDLs are valued initially at cost, so it is their amortisation that needs to be watched); and fourthly, the ethics and skills of the key managers varies.

Profit Engines

The common factor that the various companies that one would be tempted to compare is that they all buy PDLs, and attempt to profit by collecting on them, but they tend to have other businesses like collections-as-a-service, credit provision, plus other lines, and these impact performance ratios – e.g, collections as a service requires little capital.

PDL Quality

PDLs fall into quality classes, so one does not know if one is comparing like with like when comparing companies that buy PDLs. PCN states that it only buys bank debt, and not utility debts. They may buy better quality paper than CCP buys, but I would be surprised if the quality was different enough to justify the low amortisation rate that PCN seems to use.

Accounting Conventions

In the PDL-collections business, the NPAT that a company ascribes to that activity is substantially dependant on the valuation of the PDLs in stock. Consequently, a conservative management that tends to undervalue the stock by over amortising it, will initially declare a low NPAT, but in time the NPAT tends to improve, because the low-valued older debt delivers more income and profit than the value of the PDLs in the Balance Sheet suggests. This lag effect is why CCP now has a superior ROE compared to the likes of CLH. Additionally, CCP has a habit of over delivering.

CCP tends to procure a consistent quality of PDLs, and amortises them at a rate of about 47% of its collections. PCN seems to amortise at about 30%, so either it is under amortising, or the quality of the paper is significantly better than what CCP buys. You need to investigate this.

Management Ethics and Skill

PDL-collections business allows management more latitude for time-shifting profits than a typical business. Short-term management incentives may tempt managers to forward-shift profit, and if they hold many shares, this may tempt them to give an illusion of profitability to boost the SP, and to exit their holdings at an elevated share price. In the long term, this puffery must come to an end, and the dismal years of correction follow. A PDL-collections business may also be tempted to puff profits and equity value to facilitate capital raising, with the usual story that the company is performing so well, that it would be a shame not to hurl more money at PDLs.

Hurling more money at PDLs may tempt inexperienced management to rely too much on debt. Some debt is OK, because it would be unwise to keep sufficient reserve of cash to buy PDLs at good prices when they become available, which is intermittently. Debt to handle irregular events is different to debt required to handle routine business.

Conclusion in Respect to CCP

CCP tends to over amortise PDLs, and hence its total Balance Sheet value of PDLs is undervalued, and in all likelihood the Current-asset component is undervalued too. I do not know why the Current-asset component relative to the total rose significantly between 2014 and 2015 (see table below). It could indicate that collections in FY2016 are expected to be significantly higher.

I would be wary of any PDL-collections company that had an amortisation-to-collections ratio of less than 47%. PCN's low ratio of roughly 30% would need to be justified.

My investment in CCP is basically a bet based on the competence and ethics of CCP's management, which is a subjective matter, and it carries the risk that a key manager, like Thomas Beregi, could leave the company, and be replaced by a cowboy.

Below are CCP metrics that may be useful:

	Column 1	Column 2	Column 3
0	​	FY15​	FY14​
1	PDL collections​	288186​	288106​
2	Less: PDL amortisation​	-135721​	-136242​
3	Net PDL collections​	152465​	151864​
4	Percentage of PDL amortisation to collections​	47.09%​	47.29%​
5	​	​	​
6	Current Asset PDLs​	65489​	51063​
7	Non-current Asset PDLs​	91712​	101641​
8	Percentage current​	41.66%​	33.44%​
9	Percentage Non-current​	58.34%​	66.56%​
10	​	​	​
11	% of Current PDL Assets to PDL collections​	22.72%​	17.72%​
12	% of Current PDL Assets to PDL amortisation​	48.25%​	37.48%​
13	% of Current PDL Assets to net collections​	42.95%​	33.62%​