Collection House share price jumps

Collection House Limited (ASX: CLH) has seen its share price jump 5.7% to $1.11, after providing an upbeat trading update to the market today.

As the announcement states, “An improving trend in Purchased Debt Ledger (PDL) collections has been sustained throughout the quarter ending March [2016]. This has been a result of the restructure of operational reporting lines in November 2015 and the adjustment of collection strategies, in response to our early indication of emerging unfavourable economic trends.”

The group has also been successful in further PDL acquisitions, with new transactions secured during the half and further wins expected. Some key sellers are increasingly receptive to considerations beyond prices paid, such as market sustainability and compliance.

In the company’s first half results, CEO Matt Thomas reported that PDL acquisitions were down by 26%, and revised down the group’s full-year earnings to between $15.5 and 19.3 million, (after reporting $8.3 million for the first half).

Investors were spooked by the update and results, with the share price crashing from $1.60 to just over $1 in a week in mid-February.

A number of new entrants to the PDL market and their readiness to pay much higher prices for PDLs than Collection House meant the company was struggling to generate revenue. PDLs are the lifeblood of debt collection companies like Collection House – without them, it’s like a manufacturer with no raw materials.

One company that may have been overpaying for its PDLs is Credit Corp Group Limited (ASX: CCP), which reported a whopping 76% increase in PDL acquisitions in the first half. That may come back to bite Credit Corp if it is unable to recoup its costs.

Foolish takeaway

Competition in the PDL sector appears to have intensified over the past six months, and there were media reports in September 2015 that Encore, the world’s largest debt collection agency was buying 50% of Baycorp, Australia’s largest debt collector.

However, today’s update suggests Collection House can still compete with Baycorp and has the ATO contract as an ace up its sleeve, which will generate ongoing revenues over the next few years. The current price may well be an opportunity at around 7x forecast earnings and a monster fully franked dividend yield of over 8%.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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