My own recollection of debt collectors consists of a couple of burly blokes knocking loudly, wedging a foot in the door and none too politely removing my guitar and nearly new bicycle with contemptuous expressions. Since then things have changed with debt collection now known as receivables management and payment terms negotiated on mutually agreeable terms. What's more, several receivables management companies are listed on the stock exchange.
Collection House Limited (ASX: CLH) had a healthy start to the 2014 year with first-half profit up 16.2% on a comparative basis. However it should be noted earnings per share only increased 3.3% due to a share issue in this period. Receivables management companies make their living by purchasing debt ledgers (PDLs) from banks, finance companies and utilities – and then realising the value over a period. Therefore it is an ideal business for number crunching assessors who evaluate the risks within these debt ledgers before making an offer. Bad judgements here can quickly turn assets into liabilities.
As well as its main business Collection House also owns a boutique brand incorporating a legal practice which is used in specialist areas. Forward guidance for the full financial year is for a net profit of $17.5-$18.5m placing Collection House ($1.84) on an estimated price earnings ratio of 13.67 and a fully franked dividend yield of 5%.
Collection House has a return on equity of 11.3% and a debt to equity ratio of 28%.
Credit Corp Group Limited (ASX: CCP) also had a good half with profit up 18%. Significantly larger than Collection House, Credit Corp has also started operations in the US and so far has achieved limited progress in this difficult market. In addition Credit Corp also has a rapidly growing (from small beginnings) consumer lending division which is expected to become profitable in FY2015. This lending division is also useful in extracting further value from an extensive database.
Management guidance is for a 2014 profit of $33m-$35m; placing Credit Corp ($8.95) on a price earnings ratio of 12.26 and a fully franked yield of 4.8%.
Credit Corp has a strong financial structure with a debt to equity ratio of 18.7% and a return on equity of 22%.
Receivables management is one of those service industries which is fairly immune to economic cycles and can continue to enjoy steady growth. Both these companies are well managed and remain undervalued by the market. With good yields and reasonable growth outlooks both rank as current buying opportunities, however, in my opinion Credit Corp offers the better value.
