Why the Collection House Limited share price is climbing today

Credit: Chris Potter

This morning debt collection business Collection House Limited (ASX: CLH) reported a net profit of $8.2 million on revenue of $63.4 million for the six-month period ending December 31 2017. The profit and revenue were up 0.5% and down 4% respectively on the prior corresponding half.

The company will pay an interim dividend of 3.9 cents per share on earnings of 6.1 cents per share, with the dividend reinvestment plan reactivated at a 2.5% discount.

On the positive side the group reported that debt pricing conditions were beginning to pick up after a couple of tough years. The cheaper the group can buy rolled up debt bundles the greater the risk-adjusted margin it can make in its attempts to recoup it from debtor consumers or small businesses.

Commonly the group will buy bundled up consumer debt off large banks like Commonwealth Bank of Australia (ASX: CBA) or telcos like Telstra Corporation Ltd (ASX: TLS) for example after the original creditors decided it’s not worth their time or cost to chase it anymore.

Collection House even upgraded guidance for total debt purchases for the full year to between $70 million to $75 million. Moreover, partly as a result of this it increased its full year earnings per share guidance to 14 cent to 14.5 cents per share, which means shares change hands for just 9x forward earnings on a 6% trailing yield.

That looks cheap on face value, although debt collection traditionally trade on low earnings multiple due to the lack of visibility over medium terms cash flows. Still I would not be surprised to see the stock track higher over 2018.

However,  I’d still prefer the more consistent track record of Credit Corp Group Limited (ASX: CCP) if I were interested in the debt collection space.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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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