The share price of Australia's largest debt-collector, Credit Corp Group Limited (ASX: CCP) has surged by 13.4% today prior to being sold down to a more modest gain of 9.4%. The Credit Corp share price rallied as high as $19.10 before falling back to $18.43 at the time of writing. The surge came following the company's announcement of its FY20 results.
Credit Corp has clawed its way back from a $6.25 low in March this year, yet still faces an uphill battle returning to its 52-week high price of almost $38 seen in February. This may present an opportunity too good to miss for prospective investors wishing to take advantage of this 51% discount to the company's share price highs.
So why were this morning's results so well received and is now the time to dive in and invest in the Credit Corp share price?
Credit Corp FY20 results
The business model of a debt corporation like Credit Corp has been one of the beneficiaries of COVID-19 as liquidity in the marketplace has dried up and many businesses have struggled in the repayment of debts. This company is commonly outsourced to recover debts on behalf of banks, telecommunications providers and utility companies at a discount.
In its announcement to the market this morning, Credit Corp reported a 13% improvement in Net Profit After Tax (NPAT) before adjustments of $79.6 million. In addition, the company's total revenues for the period were marginally lower at $313 million compared to FY19 sales of $324 million. In accounting for these lower revenues, the company cited that COVID-19 economic uncertainty had meant customers were less willing to agree to longer-term debt repayment plans from March onwards.
Yet, this trend was somewhat offset by an improvement in one-off customer payments in May and June, possibly spurred by government benefits such as JobKeeper and people paying off debts with their FY20 tax returns.
The federal government's announcement last week that it would be extending coronavirus-related fiscal stimulus through to March 2021 is a potential tailwind for Credit Corp. Further cash in people's pockets will enable them to prioritise debt repayments.
Overall, therefore, Credit Corp remains optimistic that it can achieve further profitability in FY21 and provided guidance of between $60 and $75 million for NPAT, an earnings per share (EPS) range of 89-112 cents, and a dividend range of 45-55 cents per share. If achieved, this could yield a 2.7% fully-franked return to shareholders over FY21. This represents a relatively sizeable payout in the current economic environment.
The company has also appeared to strengthen its balance sheet over the second-half of FY20, aided by an equity raising of $152 million and over $400 million in cash. In a twist of irony, the company's announcement also highlighted that Credit Corp itself is effectively now 'debt-free', a feat the company believes will enable it to 'facilitate continued purchasing and lending over an extended period of uncertainty and prepare for opportunity'.
Should you invest?
Looking forward to the coming 12 months, I think Credit Corp will profoundly benefit from lingering liquidity issues in Australian businesses and broader commerce. The fact that Australia technically entered a recession (2 quarters of negative GDP growth) in June this year, coupled with a second-wave of COVID-19 rapidly advancing across our borders, spells trouble for businesses.
Recessions are generally associated with businesses defaulting on loans and closing their doors, and experts agree it is going to take an avalanche of continued government stimulus to keep small businesses on life support in perpetuity.
Whilst this is obviously not good news for business and the economy overall, I do see a lot of potential for Credit Corp's debt book to grow over the next year. Particularly as clients like the big four banks are forced to outsource debt to third parties. The company has bolstered its balance sheet and has done extraordinarily well to maintain a profit over FY20 considering the circumstances. Keep an eye on the Credit Corp share price to continue performing strongly in the coming months, particularly if domestic economic conditions remain as volatile as they are now.
