Is the Collection House share price headed back above $2.00?

After a 20% rise in the share price of Collection House Limited (ASX: CLH) in the past week, investors could see the share price back above $2.00 in no time.

That would still be a long way from the 52-week high price of $2.44 set at the end of August 2015, but much better than the 93 cent lows experienced in April 2016. That slide came after Collection House issued a series of profit downgrades and a first-half fall in net profit of 26%.

The company said that was mainly to do with high prices expected for purchased debt ledgers (PDLs). Debt collectors like Collection House need to impose strong limits on what they will pay for PDLs – or risk not being able to collect and seeing their profits turn to losses. On the other hand, PDLs are the primary source of revenue, so if the company can’t or won’t purchase them, then there’s no revenue at all.

The problem is compounded when PDLs generate revenues for some years into the future. No PDLs means lower revenues down the track.

However, excluding significant items, Collection House is still forecasting a net profit of between $18.9 million and $22.7 million for the 2016 financial year, after reporting a first-half net profit of $8.3 million.

For a company with a market cap of just $182 million, the current price appears to still represent a cheap price – a P/E of less than 9.6x. Particularly if you consider rival Credit Corp Group Limited (ASX: CCP) is trading at a P/E of ~15x.

A new CEO and an improved performance in PDL acquisitions also suggest that Collection House could deliver a better than previously expected profit result. The company is also paying a generous dividend yield – currently around 6% trailing and fully franked too.

Foolish takeaway

The fears that Collection House’s business was coming to an untimely end may have been exaggerated and this is one business investors might want to add to their watchlist.

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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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