Is Collection House Limited the best ASX-listed small cap stock? 

Buying shares in Collection House Limited (ASX:CLH) could be one of the best investment decisions you will ever make.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Most of the media attention given to Australian equities is understandably focused on S&P/ASX 200 stocks, and blue chips in particular. However, once you move beyond the banks, big miners and national retailers, there are some real gems to be found at the smaller end of the market. These don't have to be high risk, ultra-speculative gambles either. With a little research it is possible to find smaller firms with sound business models and long growth runways. Collection House Limited (ASX: CLH) is one such company that many investors will not have heard of.

What does the company do?

Collection House is an Australian-based debt collection and receivables management company founded in 1992. It is headquartered in Brisbane, and employs more than 800 staff in offices throughout Australia, New Zealand and the Philippines. The company's full range of services includes:

  • Purchased debt ledgers (PDLs) – buying delinquent debt at a discount which it then recovers to generate a profit
  • Collection services – assisting businesses with recovery of delinquent debts on a commission basis
  • Receivables management – complete outsourcing service for clients
  • Legal & insolvency – provision of legal advice on recovery and insolvency related matters
  • Credit management training – provides development and training to personnel in the collection industry

With a market capitalisation of $300 million and annual revenue of $107 million (FY14) it is the second biggest company in the local recoveries industry, behind Credit Corp Group Limited (ASX: CCP).

How has it performed?

The management team at Collection House has established an excellent track record when it comes to generating revenue, profit and dividend growth. Revenue has grown at an average rate of 10% per year over the past four years. Over the same period net profit has doubled. The needs of income investors have not been forgotten either – since 2011 dividends have increased by almost 30%.

The company's share price has benefited from this stellar operational performance. Shares in Collection House have outperformed the S&P/ASX 200 over the past 12 months by 21%. Over a five-year timeframe the margin is more heavily in Collection House's favour, beating the index by 155%. This reflects the market's view of both the past performance and future growth prospects of the business.

Current value?

Collection House currently trades on an attractive price-to-earnings (P/E) ratio of 15 with a fully-franked dividend approaching 4%. At current valuations it trades at a slight discount to Credit Corp Group, but with a significantly higher dividend yield. Furthermore, the company's growth prospects for the future remain strong. In recent months it was announced that Collection House has launched a new partnership trust, backed by Balbec Capital LP, which will enable it to participate in larger PDL opportunities and further boost revenues.

Foolish takeaway

In recent years, Collection House has been able to grow profit at a double-digit rate despite an environment of low interest rates and economic conditions that see the big banks reporting bad debts at or near record lows. In the event of an economic downturn, the rate of bade debts will increase, providing a significant tailwind to businesses in the recovery industry. Collection House is well placed to take advantage of such conditions. In the meantime, investors can enjoy a fully-franked dividend yield of just under 4%, which is both generous for a company with such growth prospects and likely to increase in the coming years.

Motley Fool contributor Steven Macek owns shares in Collection House. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »