Credit Corp Group: Good momentum, but still a risky proposition

Credit Corp Group Limited (ASX: CCP) announced strong earnings and raised its profit forecast. On a valuation and dividend yield, the shares look attractive, but there are risks.

What: Credit Corp released its first half FY 2012 results to the market on Thursday 2nd February 2012 and upgraded its full year profit forecast from $23-$25m to $25-$27m. Earnings per share for the full year are expected to be in the range from 55-59 cents, up from 50-55 cents forecast in November 2011.

There were a number of items of note in the release and presentation.

  1. Settlement of a shareholder class action (with majority of costs being paid by the company’s insurer). This was due to the company failing to promptly disclose certain matters regarding its profitability and breaching continuous disclosure obligations under the Corporations Act (amongst others) in 2008.
  2. The company has commenced consumer lending and has a current loan book of $2.5m.
  3. The company has started purchasing US debt, with purchases of $1m to date.
  4. Purchased Debt Ledger (PDL) collections and fee income up 12% to $115.6m, compared to the previous corresponding period.
  5. Free cash flows have been strong over the last 12 months and the company has used it wisely, reducing bank debt from $35m to $13.5m.

About Credit Corp
Credit Corp is engaged in debt purchase and collection. The company’s primary business is the acquisition of purchased debt ledgers (PDLs) comprised of distressed consumer debt. Credit Corp specialises in the purchase of consumer debt ledgers, such as credit cards and unsecured personal loans.

So What: Its nice to know that not every company out there is struggling at the moment. The market certainly liked the announcement, pushing the company’s shares up 7 per cent from $4.76 to $5.10.

As mentioned above, cashflows were strong again for the 6 months, and net bank debt has fallen steadily in the last 12 months from $35.1m to $13.5m as at 31stDecember 2011. If the company continues paying off its debt at this rate, it should be almost debt free by June 2011.

Based on the current share price and 1sthalf FY2012 earnings and dividends, my forecast P/E for 2012 is 9.3 and dividend yield is 5.1% (fully franked as well), which is attractive.

Now what: Buying debt ledgers is a risky business. In most cases, the sellers consider the debts to be “bad or doubtful” debts; they don’t want to waste time and effort chasing up repayments, and need to get the debts off their books. The key factor for Credit Corp is the margin they receive back on those debts over what they paid for the debt.

If management take their eye off the ball, things can deteriorate rapidly, as happened in 2008, when net profit slumped to $5.4m from $19.3m the previous year, the company got hit with a $6.5m shareholder claim and both its CEO and Chairman resigned.

If you have confidence in the current management, then Credit Corp has good momentum, and the shares look attractive on a valuation and dividend yield perspective. They could be worthy of further investigation.

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Motley Fool contributor Mike King does not own shares in Credit Corp.  The Motley Fool ’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.  Click here  to be enlightened by The Motley Fool’s disclosure policy.

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