Shares in debt collection business Credit Corp Group Ltd (ASX: CCP) have dropped nearly 3% to $17.50 today despite the company providing a seemingly strong result for its first half of financial year 2017.
For the period the group reported a net profit of $25.2 million on revenues of $129.1 million with earnings per share (EPS) coming in at 53.2 cents. The profit and revenue were up 19% and 15% over the prior corresponding period, with the group reconfirming guidance for full year profit between $53-$55 million, up around 15% to 20% on the prior year.
The group also seemed to enjoy a relatively benign debt ledger pricing environment with collection efficiency labeled as in line with the prior year. Its main listed rival in Australia in Collection House Limited (ASX: CLH) flagged challenging conditions in early 2016, although Credit Corp appears to have not encountered similar problems.
The group also has a small but growing consumer-micro-lending business which is a sector that in general has been buffeted by regulatory pressures in recent times, although it seems to be performing reasonably well.
Its only real weakness has been its loss-making U.S. operations, where it appears to have found debt buying and collection markets a little too hot to handle, although it reported that losses in the region were reduced by 50% compared to the pcp.
The reason the share price has come under pressure today is probably more to do with investor expectations than company performance, as the stock at $17.54 trades on around 16x the company’s forecasts for total EPS in FY16 even after today’s price falls.
Given it also offers an expected yield in the region of 3.2% this may sound cheap, but investors should be aware that debt collectors traditionally trade on low earnings multiples due to the limited short-to-medium term earnings visibility.
In my opinion then the stock looks around fair value, as despite the strong track record it would not be a big surprise if pricing in the debt markets in which it operates edged higher over the years ahead.