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CCP before Thomas Beregi became CEO was a wild ride, and that is why he was pivotal to me deciding to invest in CCP a year ago at $9.607 on average. I use Thomas Beregi as a proxy for the management team – if he goes and management sticks to the current modus operandi, all may be well. Put a cowboy in charge, and the Dunning–Kruger effect will soon manifest itself, and CCP could be destroyed (remember the Bank of South Australia's collapse in 1991). Beregi's discipline has lead to CCP being formulaic and successful. Finding another CCP-type turnaround ahead of the investing herd is not easy.
Benjamins suggested 10% – 20% growth if the USA venture gained traction. I would worry if expansion were debt fuelled, and too fast to be digested. 20% is possible as a spurt, but not sustainable for years, as CCP learned in 2007. 10% organic growth for years to come in an other-things-being similar setting is fine.
I'll use this response to elaborate on aspects of accounting, because I mentioned in my last post that CCP's upfront 20% provisioning for doubtful debts for unsecured loans shifts NPAT to a later accounting period, but I did not explain how it differed for Purchased Debtors Ledgers (PDLs). CCP shareholders may know this, but some HC readers may not. I am not an accountant, but I'll attempt to explain how the accounting used for these two forms of debt differ. I'll exclude how interest revenue is handled, because I think they are treated similarly for both groups of debt.
Loan Book Accounting
Accounting treatment or unsecured loans recognises each loan (credit Cash, and debit Loan Book). These are both Balance Sheet accounts, so the affect on NPAT is zero. A 20% upfront provision is made (debit Provision Expense, credit Provision for Doubtful Debts), and because Provision Expense is part of the P&L accounts, an initial loss on each new debt is recorded, and the Balance Sheet shows a smaller asset value (it being reduced by the 20% provisioning).
CCP elects to use 20% because the ATO allows it to do so, but in time the accounting process corrects the provisioning. Over provisioning helps delay tax payments, which benefits shareholders, and it acts as a reservoir that helps keep the reported NPAT steady over time, which is good for the nerves of interested parties who cannot read between the lines, and/or cannot bide SP zigs that reported NPAT dips cause.
PDL Accounting
No similar timeshifting occurs in the accounting treatment of PDLs, because the total purchase cost is amortised as collections occur. It is similar to using standard costs, and adjusting the standard so control accounts balance to zero. Good analytics are required to obtain a realistic standard cost initially, and to adjust it in small steps to continually keep it realistic.
Values used below are chosen as approximations of CCP's reality, and these and derived values are used in an explanatory model, rather than being rigid factors. Appearances of preciseness in derived values may flow from mathematical correctness when using the chosen values. Amounts reduced to $1 or less are to make the arithmetic easy to comprehend.
CCP usually collects about 2.13 times what it pays for PDLs. CCP evaluates what it expects it could collect from debt offered for sale, and it tends to buy the debt at about 47% (1 ÷ 47% ≈ 2.13) of that value, which is typically 20% of the face value of the debt. In this setting, $1 of face value of good quality PDLs tends to deliver 42.55c collected within the life of PDLs, and CCP would pay 42.55c x 47% ≈ 20c for the debt. Amortising debt at the rate of 47% of collections means that by the time CCP has collected 42.55c for each $1 face-value of debt, which averages about two years to occur, the 20c purchase cost in the Balance Sheet would be fully amortised.
The amortisation percentage is continually altered in small steps that flow from an algorithm used to value the remaining debt expected to be collected, but it tends to be circa 47%. The 20c in the dollar paid for quality PDLs purchased from banks is a number I have seen somewhere as the price of debt bought from the major Austraian banks, and it should be viewed with latitude. Poor quality debt is sold for much less – a few cents in the dollar. I do not know what debt CCP buys, and what it rejects, but I imagine it avoids low-quality PDLs.
The valuation of expected collections is kept outside the Balance Sheet. If the valuation methodology is incorrect, then amortisation and the consequent NPAT would be wrong, as would be the the Total Assets and Equity values in the Balance Sheet. Management with an inappropriate mindset could do a great deal of mischief by overvaluing PDLs, and also if they paid too much for PDLs initially as a result of being too bullish on collection expectations.
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