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Morningstar | Strong Momentum in Credit Corp’s U.S. PDL and Australian Finance Businesses Results in a FVE Upgrade

No-moat rated Credit Corp Group produced strong fiscal 2019 half-year results, driven by its growth engines of United States purchased debt ledgers, or PDL, and its Australian and New Zealand lending business. The momentum in its growth businesses prompts an increase in our fair value estimate to AUD 20.70 per share from AUD 19.80. We also increase our forecast underlying net profit after tax, or NPAT, for fiscal 2019 to AUD 69.5 million from the previous AUD 68.1 million, which is in line with the company’s upgraded guidance of AUD 69 million-AUD 70 million, previously AUD 67 million-AUD 69 million. We also expect the fiscal 2019 dividend to increase to AUD 0.73 per share from the previous AUD 0.71. At our fair value estimate the company has a fiscal 2019 P/E of 14.2 times and dividend yield of 4.2%.

We forecast overall PDL balances to grow by a compound annual growth rate, or CAGR, of 8.9% in the next five years. We expect PDL acquisitions in the U.S. to continue to generate strong growth in group PDL purchases as the firm grows its U.S. business, offsetting weakness in the Australian PDLs business. While the core Australian PDL business detracted from first-half fiscal 2019 NPAT (AUD 23 million), when compared with first half fiscal 2018 (AUD 23.4 million), this was more than compensated by strong NPAT growth from the new U.S. PDL business (AUD 2.6 million in first-half 2019 compared with AUD 0.6 million in first-half 2018). The company seems to be maintaining discipline in its core Australian PDL business. Low charge-off rates in Australia resulting in relatively low supply of Australian PDLs combined with intensifying demand is leading to what management regards as “very high prices.” This contrasts with strong market conditions for acquirers in the U.S. PDL market.

We expect the company to step up purchases of PDLs in the U.S. PDL market, which is about 10 times larger than the Australian market. We believe U.S. PDL acquisitions should offset the slowdown in the Australian PDL market and allow the firm to maintain relatively strong overall PDL growth. The company is experiencing favourable pricing in the U.S. PDL market on the back of unsecured credit growth and charge-off rates below historical averages. This provides the company with an opportunity to increase investments in its U.S. business at favourable prices. During the half, the company also expanded its seller relationships in the U.S., establishing two new purchasing agreements with two new U.S. lenders, including with the largest U.S. PDL seller. Management plans to take advantage of these conditions by increasing the number of U.S. employees, providing the platform for future expected growth.

We also expect strong growth in its consumer lending business. However, there is some uncertainty over this business from the potential regulatory risks stemming from the Senate inquiry into financial services targeting Australians at risk of financial hardship. The Senate is scheduled to provide its report by Feb. 22, 2019. One saving grace for the company is the relative low prices of its consumer products compared with some of its competitors. For example, Credit Corp’s core consumer lending product, Wallet Wizard, provides up to an AUD 5,000 line of credit to consumers at a price that the company estimates is about 66% cheaper than the typical cash loan offered by its competitors and about 33% lower than that provided by a not-for-profit alternative. We expect its online business model and lower financing costs with access to major bank lenders will allow it to continue price its consumer loans at cheaper rates than most competitors.