Views on CCP Share Price, page-29

I skimmed though your post before shooting off to an appointment, and when I returned I wrote most of what follows in a WP file off the top of my head. On rereading your post, I now realise that you had yourself suggested reasons that I had written below, but I am not going to edit out the redundant bits of my reply, because I might in the process drop something that you could find useful when considering your model.

A reason why your standard evaluation model may not have required adjustments is that you were either overtly or subconsciously using statistically sound principles that are:

• more valid for large numbers (many small components making the whole, which suits CCP's business based on thousands of debtors; and
• because you applied them to a business where good numerical analysis is apt, and applied by its management in a superb way.

Not only does CCP know how to value debtors ledgers accurately, and what its collectors collect, and when and at what cost, CCP sets its target rates of return accurately. With a minor twist of vocabulary, the same could be said of unsecured loans. Further, on numerics, I suspect Management sets CCP's rate of growth, and other ratios within that same numeric-analysis-based culture.

This numerics-based approach allows CCP to look at the many steps it takes within a framework of marginal analysis, where the returns for many groups of decisions to deploy cash and human resources are balanced to keep the return constant.

In summary, your formulaic share evaluation model fits a formulaic-driven listed company.

Now if CCP can be well run in a formulaic way, why do competitors not import specialists from areas like statistics and actuarial science to do likewise? My only answer is that CCP's management culture is different because competing business do not have the personality of Saint Thomas. Finding a Saint Thomas to run a chain of tattoo or massage parlours or a debt collecting business is rare, so similar CEOs have not appeared in other debt collecting businesses, which is not surprising.

Although conventional numerical analysis would not include the St Thomas factor, CCP's history for the last decade is sufficient grist for the numeric mill to compensate for that. It is, however, important to recognise the St Thomas factor, because one may recognise a threat thereto before the numerics display the change.

PS: I own shares in FRI, which erects multi-story units in WA. Because FRI does not book profit into WIP (it only recognises revenue, and hence profit, on settlement of units), the reported revenue and NPAT each year is very lumpy. If a huge construction project is completed late in a financial year, the revenue and implied profit is not recognised, and the cash inflow is not seen until the early weeks of the next year. This time-shifting factor usually applies to more than one project. Your standard evaluation model would, I imagine, have to be more than tweaked to handle FRI.

PPS: It may be a good idea to have a valuation based on what you think a share's value is as a long-term investor, and what the SP is likely to be pursuant to the moody nature of Mr Market. If you take a stock like NWH (mining services and civil construction), and consider what would happen if a $250 million contract to complete Stage 2 of the Eliwana Rail Project were announced. Logic should suggest that NPAT should benefit to the tune of $12.5m, or 3.15c a share, but in the current bullish mood for that stock, the SP would jump 10c to 20c on that news, but the truth is that there is so much work in NWH's tendering pipeline, that if that contract went to a competitor, NWH would likely pick up as much alternative work as it can handle without getting a hernia.