Credit Corp Group Limited rockets on double-digit profit growth forecast

Credit Corp Group Limited (ASX:CCP) has kicked off earnings season in style.

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Debt

Shares in debt collector and small loan provider Credit Corp Group Limited (ASX: CCP) have blasted higher this morning after the group revealed a net profit of $45.9 million on revenues of $226.7 million for financial year 2016. The net profit and revenues are up 20% and 19% over the prior financial year.

Moreover, the group has guided for FY 2017 profit growth in the region of 13 to 18 per cent on the back of an elevated debt ledger purchasing program that should drive increased collections and earnings from the debt ledger business.

The consumer lending segment is also anticipated to contribute significant growth in FY 2017 with the second half of FY 2016 posting a profit of $4.7 million out of the total full year profit of $6.1 million. Over the year the consumer lending book grew 35 per cent to $135 million, with return on assets increasing to 9 per cent in the second half. For the consumer lending business return on asset growth is a key profitability metric that is accelerating alongside the loan book in another positive sign for the outlook.

The total full year dividend is 50 cents per share, which places the group on a trailing yield of 3.25% with forecasts for the dividend to lift to 55 to 57 cents in FY 2017.

Debt collections

Credit Corp’s core purchased debt ledger (PDL) business in Australia also posted a strong result with total PDL acquisitions 63 per cent higher than the prior year and collection efficiency “maintained” despite a 9 per cent increase in the workforce. The company stating that its data analytics helped drive efficiencies and it appears to have found debt competitively priced to ensure decent returns on its investments. Earlier in 2016 rival debt collector Collection House Limited (ASX: CLH) blamed deteriorating debt pricing on a profit downgrade, although notably this does not appear to have been an issue for Credit Corp.

US debt collection business

Credit Corp’s Achilles’ Heel has been its loss-making US operations where it initially found US debt markets too hot to handle with high prices and major issuers less reliable than their Australian peers. The group hopes US operations will achieve monthly breakeven in the second half of FY 2017, although its problems in the US remain a key risk for investors.

Foolish takeaway

After today’s 15 per cent rise the shares trade at $15.40 on 15.6x trailing earnings per share of 98.4 cents delivered in FY16. Given the group is forecasting profit growth up to 18 per cent in FY 2017 this may seem cheap, although it’s worth noting debt collection businesses are traditionally valued on low earnings multiples due to the limited short-term earnings visibility on PDLs. This remains the key risk and despite the growth I think there are better growth stocks available to investors than Credit Corp.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned. You can find Tom on Twitter @tommyr345 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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