Many weeks ago, 600mL started this thread by asking for views on CCP. My instinctive valuation was $23, but I did not then venture it, because I could not proffer a reasons for having that target. At https://www.fnarena.com/index.php/2019/01/30/credit-corp-sets-sights-on-us-expansion/ there is an article suggesting that $23 may be reasonable, because brokers also value CCP at about that target price.
The negativity I noticed in some posts, and brokers's opinions, centred on the fact that CCP's PDL purchasing in Australasia was crimped by competitors, including Pioneer Credit. My own view was that CCP is a superb deployer of both cash and collection resources (employees), and it always seems to reach a target profitability, plus reasonable growth. What makes CCP's management style different is the following:
Management starts from a position of preset profitability targets, and it deploys its collection teams and its investments in loans and PDLs to meet that target. Consequently, if Australasian PDLs are expensive, it deploys cash into personal loans or USA PDLs, and it deploys its PDL collection teams to collect on older PDLs, where the dollars collected per collector may be lower, but due to generous amortisation initially, the amortisation cost of the old debt collected is low, which offsets the extra cost of the collection process.
CCP makes no attempt to achieve higher profitability to make the short-term and medium term look good. If anything, it dampens the performance spikes to make the long term steady and predictable.
I suspect, but I do not recall it being mentioned, that CCP also targets a rate of growth, and it does not try to eclipse that. It's near-death experience years ago has taught Management to grow the business steadily, and to ensure it has the buffers to do that. Buffers include collection capacity, balance sheet valuation conservatism, and in personal loans, a lower rate of interest than is possible and allowable, which means it can pick the better quality borrowers.
Management has no incentives to indulge in puffery to make a short-term personal gain (either via bonuses or via capital gains on the stock) at the expense of the long-term welfare of shareholders, and then skip out with the pelf, and leave an incoming team to clean up the mess.
The PDL-collections business.
One should the keep an eye on the percentage of PDL amortisation to PDL collections. If it is too low (below 45%), then it may be that NPAT has been inflated, and the corollary is that the asset value of PDLs is too high. The ratio would tend to decline as the average PDL age increases, so be suspicious of a low percentage at a time when PDL purchases are high. The figures below relate to CCP:
The percentage is derived from the book valuation of the PDLs, and not vice versa. I do not know how CCP derives that valuation, but I think it estimates what it expects to collect from each register of PDLs that it buys, and initially it amortises that expected non-collection over five years years using a straight line method, because that is what the ATO probably allows. If its expectations were too bullish, perish the thought, then it may have to increase the amortisation in later years, when the proverbial hits the fan. CCP's initial estimations are probably correct, but it may err on the side of conservatism to a degree acceptable by the ATO.
Some years ago I read an NZ Taxation ruling at http://www.ird.govt.nz/technical-ta...ual/det-s17-use-of-profit-emerging-basis.html, which suggested to me that for each separate PDL ledger, CCP could calculate amortisation by multiplying the cost of each ledger, times the forecast collections of the ledger for that year divided by the total forecast collections of the ledger.
If CCP uses the foregoing methodology, then the ATO may mandate that amortisation be fitted to a 5-year collection window, as the NZ information implies for NZ. The Australian statutory time limit for collecting unpaid debts is six years. For now, I assume that the 5-year window applies for calculating annual amortisation for CCP. The USA situation may be different, but the gist of the taxation and accounting treatment should be similar.
If the foregoing amortisation methodology is used, then irrespective of the accuracy of the total initial forecast of each ledger's collections, the purchase cost of each ledger must be fully amortised over six years in Australia, because that is the statutory limit for debt collection. Consequently, in that time the profits recorded would self-correct, but they could be inflated in the early years of each ledger if it suits management to indulge in performance puffery.
From memory, I seem to recall reading that, on average, CCP collects what it paid for debt within fourteen or fifteen months, and over time it collects a bit over twice what it pays to buy debts. For a target contribution to NPAT, this would only be true if the quality of the PDLs remained reasonably consistent, because inferior quality PDLs would have a proportionately higher collection cost.
CCP Price at posting:
$21.90 Sentiment: Hold Disclosure: Held
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