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Collection House Limited (ASX:CLH) shares zoom higher on guidance upgrade

It looks set to be yet another positive day of trade for the Collection House Limited (ASX: CLH) share price on Tuesday.

In early trade the receivable management company’s shares are up almost 8% to $1.69.

This means Collection House’s shares have now risen a sizeable 34% since this time last year.

Why are its shares on the rise today?

This morning Collection House announced that it has upgraded its full-year guidance for its investment in purchase debt ledgers (PDL).

This will be the second time this financial year that management has upgraded its PDL guidance. Initially it was for between $63 million and $65 million but was subsequently upgraded to between $70 million and $75 million.

This has now been lifted to between $80 million and $84 million, approximately 27% to 29% higher than its initial guidance.

According to the release, the increase in its full-year PDL investment is due to the company taking steps to “leverage the opportunities that have arisen from the requirement for Australian Banks to fully comply with the provisions of AASB 9 from 1 January 2018.”

Pleasingly, although the company continues to buy at pricing levels that are within its historical range, management expects to generate higher returns on these investments. This is due to improvements in collection efficiencies, technology adoption, and improved data analysis.

Should you invest?

Although its shares are no longer the bargain buy they were only a few months ago, I still see a lot of value in them.

Even after today’s strong gain Collection House’s shares are trading on an undemanding price-to-earnings multiple of under 12x trailing earnings.

And while it shares have a habit of trading at a reasonable discount to the market average, I still see this as cheap given management’s expectation of earnings per share growth of between 23% and 24% year-on-year in FY 2018.

Furthermore, its shares offer investors a trailing 4.7% fully franked dividend. If the company’s strong form can continue, I see no reason why this dividend wouldn’t increase in line with earnings in the future.

Overall, I think this makes Collection House a good small cap option alongside the likes of ELMO Software Ltd (ASX: ELO) and Paragon Care Ltd (ASX: PGC).

And these small caps could be equally good investment options in FY 2019. Do you own them?

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended ELMOSFTWRE FPO. The Motley Fool Australia has recommended Paragon Care 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 Scott Phillips.

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