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Collection House expands service, grows earnings by 23% in 2013

The receivables management service provider Collection House buys and handles debt ledgers from businesses mostly in the banking, finance and telecommunications sectors. Likewise, it is a collection agency for outstanding debts on a “fee for success” basis.

I spoke with Matthew Thomas, Collection House managing director and CEO about his company, to get a better understanding of how it operates and what business prospects it has.

The company is changing the face of debt collection by its treatment and interaction with customers. In the past customers used a simple payment portal, like online banking, yet now customers can use an interactive platform to work out their own assets and liabilities, incomes and expenditures, and receive suggestions on possible repayment plans and advice on commercial outcomes.

On the business side, the company’s new internally developed C5 information platform interacts with the customer database, prioritising accounts and gathering and validating information to manage repayments and reduce delinquent accounts.

In 2013, it raised its NPAT to $15.6 million from $12.68 million, up 23% and keeping in line with its three-year compound annual growth rate of 20.5%. The sustained growth in 2013 was due in large part to staff increasing by 9%, the completed capital raising, its restructured collections business services and the rollout of C5.

Back to basics

Beginning in 2010, around the time when Thomas became CEO, analytics took a higher prominence in the organisation, driving decisions based on data rather than management inclination.

He explained: “Before that the culture of the business had also changed, with the previous CEO’s ‘back to basics’ focus. Execution of strategy was greatly improved and the benefits of those prior investments in 2008-2010 have been enjoyed over the past three years with stronger business.”

The company has seen a return to quality among its client businesses like government organisations and banks. Clients are looking for safe and quality service because they want to protect their own brands. Collection House treats their customers ethically and conservatively.

“Working more like financial counsellors rather than debt collectors, the recovery rates are higher, with net costs lower in the end. This was evidenced by the first-quarter result of a 13% increase in collections year-over-year.”

Its other business segment, purchased debt ledgers from companies, has a different dynamic because of increased competition. Prices for purchasing debt ledgers have been driven up by regular supply and demand. More demand by newer entrants has met flat supply.

In 2013 it purchased about $53 million in debt ledgers, moderating investment while the market was choppy, but in 2014 it projects a $60 million to $70 million range. It sees growth in the market from increased bank lending, but the full effects may take another 12 months or so to work through the system.

New markets

One new market for debt collection, energy debt sale, is growing. Starting in 2012 as a pilot test process, the company bought a tranche of debt from Australian Power and Gas. Now energy retailer companies have sold millions of energy debt, benefitting Collection House as well as other debt purchasers.

Another new market opening up is state debt or federal debt, such as the sale of Higher Education Contribution Scheme debt, where public liabilities are sold to the private sector. As government organisations scale back services, more private sector work will come, with Collection House being a direct beneficiary.

Lessons from the GFC

In some ways the GFC actually assisted the company since purchased debt was being sold at a discount of up to 30% to clear it. Furthermore, the harder credit environment reduced the number of competitors.

“The tight credit affected customers’ ability and willingness to pay, which led the company to change its collection format. It began offering them payment arrangements to pay off the debt over 5-10 years, which led to the rebuilding of its collections book. Now about 70% of revenue comes from those repayment arrangements, and for individual arrangements the present value of the repayments is actually more than what it would be based on shorter-term plans.”

Now the arrangements book is over $310 million in face value, and this strategy de-risks the company because it builds recurring cash flow that will come even during market downturns. Illustrated by the fact that in 2013 it dropped debt purchasing from $61 million to $53 million, yet achieved a 26% profit increase. When the economy turns down, this allows it to pull back on purchases and wait for the discounted sales of debt while safely continuing business.

Cash is the key performance metric

I asked Thomas by what standards or metrics regular investors could use to understand and judge the performance of the business. Sometimes financial services companies can be hard to analyse and compare with others, but he replied: “Cash is the best indicator of performance when comparing Collection House to its competitors. How many dollars are owed by the customers and how many dollars are recovered from the customers? How many dollars are spent in buying new assets? Look at the cash. If we buy debt and recover twice our investment, that’s probably a good thing as long as we cover our costs. We try to talk in simplistic terms about two time multiples- we invest this much, we aim to get twice back what we spend.”

Foolish takeaway

With a housing market recovery, increased lending will eventually lead to more receivables management and debt arrangements. Collection House’s improved business structure is taking in more business in new markets, yet competitors like Credit Corp (ASX: CCP) will be there trying take their share also. Concentrating on quality service and the ethical treatment of customers is the company’s key driver of future performance and earnings. Creating stronger service platforms also increases its utility and attractiveness in the eyes of consumers.

 

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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