Last Thursday, our regular stock picker Julia Lee from Burman Invest gave Credit Corp the tick as a favourite of hers. Today when we asked Michael Wayne to share a “HOT” stock with us, he came up with the same stock.

To recap, Credit Corp is a debt buyer, purchasing and collecting debts here in Australia, New Zealand and also the United States. In fact, Credit Corp is the largest buyer of unsecured consumer debt in Australia and New Zealand, capturing 25% of the market. The business purchases consumer and small business debt from Australian, New Zealand and US banks, finance companies, telecommunication and utility companies.

“Essentially, Credit Corp looks to purchase at a significant discount, debt between 90 and 180 days in arrears, before looking to collect that debt and profiting on the difference,” said Michael.

“The key skill is to price debt ledgers correctly and not overpay on ledgers purchased,” he added.

Michael says that management has shown that it’s very adept at purchasing wisely and growing the debt ledgers over an extended period of time. “The business exerts high asset turnover and a low cost to collection ratio among its competitors that has allowed the company to increase earnings and dividends each year for the 10 years proceeding COVID, while Return on Equity has been trending higher over that period as well,” he said.

“The recent acquisition of a large portion of the purchased debt ledger assets and arrangement book of Collection House is very positive for CCP in our view,” Michael said.

“CCP is clearly in a position of unrivalled scale in the Australian market along with what is consistently the most efficient balance sheet,” he added.  

The company was one of the first cabs off the rank to delivery its half year results in February.

“The company upgraded all key metrics and management stating they expect lending revenue and profit to return to growth in the second half after a year hindered by COVID.

“First half profit (NPAT) of $42.3m, approx. 5% ahead of forecast helped by a lower-than-expected amortisation charge. Consumer lending stabilised in the December quarter with activity in December back to 86% of the previous corresponding period.

“While revenues fell by 2% to $188 million against the prior corresponding half, the key for a business like Credit Corp is their profitability as it indicates how well they’re selecting and how efficiently they’re recovering the debt they purchase. In this instance, Net Profit After Tax grew at a strong 10% to a figure $42.3 million against the prior corresponding half.

“For a business like CCP, we give profit a far higher weighting of importance than revenues as they could significantly increase revenues relatively easily, but if they can’t efficiently collect that debt then there is no point growing those revenues.

“We would much prefer they continue with their measured approach and deliver strong profits rather than buying debt ledgers for the sake of buying without careful investigation.

“Australia and New Zealand debt buying delivered the largest proportion of profits in this most recent report but we are greatly encouraged by the +100% profit growth against the prior corresponding half from their US debt buying which is very much seen as the growth engine for the business looking ahead. Despite record investment for the half with the purchase of the Collection House Debt Ledger, management have confirmed the business is sitting on $400 million in cash and undrawn credit lines, bringing the ability to take advantage of further opportunities as they arise.

“While COVID is expected to supress purchasing in FY21 due to lack of supply, we see the US as providing the largest opportunities into the future so the early traction in the space provides confidence,” Michael concluded.

Credit Corp (CCP)