The analyst team at Shaw and Partners have come up with an interesting thesis as to why changes to negative gearing and capital gains tax in the Federal Budget could be a tailwind for Pioneer Credit Ltd (ASX: PNC).
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Weaker housing market to have a knock-on effect
In a research note sent to clients recently, the analyst team posit the notion that there will be a slowing in credit growth and an increase in debt impairments driven by softer housing conditions.
This, in turn, will put pressure on bank earnings, which will trigger a renewed focus on profit levers.
They explain further:
One such lever is the sale of written-off, aged debt, where recoveries flow directly to profit and support return on equity. We consider a surge in aged debt supply as inevitable.
Shaw and Partners said it believes the net effect could be a material positive on Pioneer Credit's valuation.
They add:
Historically, PNC generates c.2.5x its acquisition price on purchased debt portfolios (PDPs). Importantly, 50–60% of lifetime collections are typically realised within the first year. As a result, increased PDP investment should lift near-term free cash flow, as year-one collections are likely to exceed the initial purchase outlay (noting that timing differences can affect reported fiscal outcomes). In recent years, the debt recovery industry has experienced subdued supply, driven by low interest rates and regulatory constraints that limited bank asset sales. However, PNC is now observing a meaningful shift, with banks returning to the market in force. The final major bank is expected to fully re-enter the market shortly, having recently tested supply with PNC.
Shaw and Partners estimated that Westpac Banking Corp (ASX: WBC) alone could have about $2 billion in aged debt, which had been written off but which remains unresolved.
The analyst team said the market had thinned in recent years such that Pioneer effectively operates in a duopoly, and it is "benefitting from panel deselection of competitors and its status as preferred counterparty due to its compliance record''.
Shares looking cheap
Shaw and Partners has a 12-month price target of $1 on Pioneer shares, compared with 68 cents at the time of writing.
Pioneer in March upgraded its profit guidance for the full year to $23 million, which was a 28% increase on previous guidance.
The increase came about as a result of the repricing of a major debt facility and a strong operational performance.
Pioneer is valued at $107.7 million.
