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Is ACM Group the new Collection House?

Debt Collection agency ACM Group is preparing to list on the ASX, and if the recent performance of other listed debt collectors is anything to go by, this will be a closely watched IPO.

The past year has been a boon for debt collection agencies as the economy improves and Australians continue to use any spare cash to prudently pay down their debts. Over the past 12 months the share price of listed debt collection company Collection House (ASX: CLH) has increased by 98% while the larger Credit Corp (ASX: CCP) is up over 60%. At the same time both have continued to pay dividends and are currently yielding close to 4%.

After these stellar returns, investors will be watching the IPO of ACM Group closely. The company has enlisted Macquarie Group (ASX: MQC) and UBS AG (ASX: UBSN) to help manage its IPO, with a plan to list in the fourth quarter of 2013. The company is expected to raise over $200 million.

ACM Group was founded in 1982 and collects overdue credit card and personal loan debts on behalf of three of the ‘big four’ banks as well as telecommunications debts on behalf of companies such as Telstra. Founder Bert Vieira intends to remain as CEO for three years after the company lists. Mr Vieira, who will be selling the majority of his stake, described his motivations for taking the company public: “I’m not getting any younger, and the IPO will allow me to reward some of my long-standing staff by issuing them shares,”

One big question that any IPO investor should ask is what the company will be doing with your money. The best answer is that the company will be using the new cash it to invest in future growth. Unfortunately this does not appear to be the case with ACM Group where most of the cash will be instead be used to reward staff and fund Mr. Vieira’s retirement.

ACM Group has forecasted its 2014 earnings to be $20 million and is expected to list at a discount to the larger Credit Corp. With a market cap of $446 million, Credit Corp currently trades at a forward price-to-earnings ratio of 13.3. The smaller Collection House meanwhile trades at a forward price-to-earnings ratio of around 12 with a market cap of $197 million. ACM Group could therefore be expected to list at a valuation of around $260 million at a multiple of 13 times forward earnings.

Investors looking back at the share price performance of Credit Corp and Collection House should be careful to note the role of multiple expansion in those companies performances. Over the past 12 months the price-to-earnings multiple of both Credit Corp Group and Collection House have increased significantly. In other words, investors have benefitted not just from improvements in the companies’ underlying performance but from the market’s willingness to pay more for the same dollar of earnings.

When ACM Group lists it will do so at a similar multiple to that of the other listed debt collectors. This means that any further increase in share price will most likely need to be driven by improvements in the company’s fundamentals than by the market’s valuation becoming more optimistic.

“We’re ruthless, mate”

Prospective investors may also want to consider ACM Group’s debt collection practices. In November last year the company was found to have abused and “blackmailed” people into repaying their debts. A Federal Court judge issued a scathing judgement which criticised the company’s tactics of personal abuse and intimidation.

In one call recording presented to the court an ACM staff member could be heard saying “We’re from ACM Group. We’re the number one debt collection agency in Australia, all right? We – we’re ruthless, mate.” In another call the collection agent threatened to tell a women’s husband about her debts. The calls were so aggressive that Justice Perram took the unusual step of making the recordings available to the public. If these tactics make you a little squeamish then you can listen to the audio for yourself here.

Following the judgment ACM Group released a statement saying that, “All staff who were involved in these incidents have since left the employ of ACM Group Ltd.” The company also stated that “ACM has strongly condemned their actions and taken a number of steps to ensure that these are isolated events.”

Foolish takeaway

ACM Group’s move to list on the ASX will be closely watched by those who have profited from the rise of Credit Corp and Collection House over the past year. But investors should be cautious when projecting forward past successes. Much of these share price gains have come from improved market sentiment, whereas ACM Group will likely already have this higher valuation ‘baked in’ when it lists. Investors with ethical concerns about the debt collection business will also want to keep an eye out to ensure that the company has learned its lesson from its past run in with the courts.

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Motley Fool contributor Matt Joass has no financial interest in any company mentioned in this article. You can follow him on Twitter @SoloThink.

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