At what point do we buy Credit Corp (CCP)?

Following the announcement of the 1H17 result, it is worth noting a number of concerns that the market has in regards to CCP’s outlook. These include:

1. The increase in gearing levels (which are expected to moderate),
2. The US business remaining loss-making, in addition to regulatory uncertainty in the US and hence a potentially longer path to profitability for the US business than the Company guidance of FY18, and
3. Increased competition in the domestic PDL market, leading to a decline in domestic PDL contribution. Essentially, the PDL guidance is being broadly maintained because the NCML acquisition is expected to contribute around $20m in PDLs.

Overall, we contend that these risk factors do not deter from the Company’s growth profile. In particular, Company guidance for EPS of $1.12 to $1.16 in FY17 implies ~16% EPS growth for FY17 at the midpoint of this guidance, with consensus estimates pointing to essentially the same rate of EPS growth in FY18 (+16%), before moderating to ~12% EPS growth in FY19.

At the current share price, CCP is currently trading on a 1-year forward P/E multiple of 13.3x. While this multiple is attractive from the point of view that it is below the implied rate of expected EPS growth, it is broadly in line with the medium-term average of ~13x. Having said that, we consider that the next main catalyst for the stock is an acquisition of a sizeable PDL and to this end, we highlight that the limited balance sheet flexibility (as a result of the increase in net debt) could impact the Company’s ability to take advantage of opportunistic investments and larger, one-off PDL purchases, which has been a key growth driver for CCP over the past couple of years.

Looking at the chart can help us pick an entry point. CCP was sold off during October/November last year and so far it has failed to recover. The negative is that the stock has hit resistance in the mid $18’s a few times and cannot seem to head any higher. The selling in the last week has also been on large volume which is not a good sign. On a positive note though, we can see a double bottom on the chart (indicated by the arrows) as the stock rejects the low $16’s. So for the time being the chart is neutral. It needs to clear the mid $18’s to be able to go higher. Otherwise we can see possible weakness back down towards the gap near $14 which is our preferred entry point.

Michael Gable is the Managing Director at Fairmont Equities: (VIEW LINK)