Collection House Limited (ASX: CLH) shares have been on a rollercoaster in recent days.
After a disappointing announcement at the Annual General Meeting (AGM) two weeks ago indicated that profit growth would be substantially lower this year, shares plunged almost 20% to $1.82.
Investors who held on were rewarded for their patience when management subsequently announced a significant two-year contract with the Australian Taxation Office (ATO) on Friday – and shares soared again to the current price of $2.09.
In short, Collection House has been appointed to the ATO's debt recovery panel for an initial two years, commencing from April 2016. As a result, the contract is unlikely to affect the current financial year's earnings, although management indicates it 'will certainly contribute in subsequent years'.
This contract is a huge plus for the business as it represents a significant vote of faith in Collection House's debt collection services. Management has focused on developing consulting expertise that it can offer to clients in recent years, and the ATO contract reflects the culmination of that effort.
But wait, there's more
Market watchers will have noted with interest that at its recent AGM, Collection House reported that it was purchasing less debt this year as it felt that the prices paid by its competitors were unlikely to deliver attractive returns to shareholders. This is why profit growth is lower than was previously expected.
Curiously enough, Credit Corp Group Limited (ASX: CCP) recently announced a significant profit upgrade for the financial year 2016 as a result of buying more debt. Credit Corp would lift its Purchased Debt Ledgers (PDL) acquisitions from $90-120m to $125-145m, an increase of more than 30%.
As a result, Credit Corp's Net Profit After Tax is expected to lift by roughly 5%. While it's only a small lift in profit, the higher acquisitions this year will contribute to earnings for several years into the future as debt take time to collect.
This raises an interesting dilemma as obviously Collection House (and its shareholders) can't collect on debts they haven't bought. Either competitors are overpaying for debt or Collection House may be missing an opportunity.
Whatever the outcome, Collection House remains a quality, disciplined business with a wealth of expertise, and the contract with the ATO is a fantastic addition to its CV. Shares are modestly valued and I would buy more today if it wasn't already a large part of my portfolio.
