The best and worst times loom for the listed debt collectors

With apologies to Charles Dickens, it’s the best of times or the worst of times for the receivables management industry - known in less polite circles as debt collectors.

Broadly speaking the sector’s fortunes are inversely correlated to the economy, so swelling unemployment and consumer and business stresses imply rosy fortunes.

But too much misery and the ‘blood from a stone’ rule kicks in: delinquent loan books are only worth something if enough can be squeezed from the debtors to make the recovery worthwhile.

Not surprisingly the sector has a poor reputation for heavy-handed tactics, so there’s always political and social pressure for the debt wranglers not to chase the last cent by harassing impecunious debtors (or even their friends and families on Facebook).

On the evidence to date, undisputed industry leader Credit Corp (CCP) has taken prudent steps to buttress itself from the anticipated consumer pain when the government support measures and “private sector forbearance” wears off.

As with most of it peers, Credit Corp’s primary activity involves buying books of bad debts (purchased debt ledgers, or PDLs) from parties such as banks or telcos.

Thanks to finely-honed analysis tools, management can accurately predict what percentage of the outstanding debt can be recouped.

But these are not usual times and debtors are behaving in a less predictable way.

As Credit Corp noted in its recent profit results, recalcitrant debtors went on a repayment strike in March – when the Covid-19 chaos started to unfold – and abandoned long term repayment plans.

But by June 30 repayments had returned to pre-Covid-19 levels, with an “uncharacteristically” high level of one-off repayments.

Still, reflecting the reduced chance of repayments, Credit Corp has reduced the carrying value of its $540 million PDL book by 13 per cent, or $80m.

Having raised $155m of fresh equity in May via a placement and share purchase plan, Credit Corp has a $400m war chest to buy fresh PDLs – but “pricing will need to be adjusted to reflect expected poorer conditions.”

Credit Corp plans to spend $120-180m on PDLs in the current year – a sharp reduction on the $230m spent in the (pre Covid) 2018-19 year.

The reticence to splurge too much is understandable.

In its full year results this week, the Commonwealth Bank of Australia lifted its bad debt provision to $6.4 billion – 1.7 per cent of its total lending, from $1.29bn (1.29 per cent a year ago).

In the US, where Credit Corp also has a presence, JP Morgan expects credit card delinquencies to quadruple. The CBA also reported signs of trouble, but its credit card arrears blipped up to a still-modest 1.23 per cent, from 1.03 per cent previously.

Credit Corp also operates a consumer lending business, Wallet Wizard which extends unsecured ‘line of credit’ loans of between $500 and $5000.

Not surprisingly, Wallet Wizard is in the eye of the storm. The division’s lending book was worth $230 million as of December 30, but with the aforementioned repayments and tighter criteria on new lending this had shrunk to $181mby June 30.

Even so management has provisioned for 24 per cent of these loan amount to go sour, compared with its initial estimate of 18.7 per cent.

Despite the vicissitudes, Credit Corp’s underlying earnings rose 13 per cent to $79.6m (pre the Covid adjustments).

Out of an abundance of caution the final dividend - worth 36c a share last time around – has been put on ice.

Such is Credit Corp’s analytical prowess that the board is comfortable guiding to current year earnings of $60-75 million, with a full-year dividend of 45-55c a share.

With Covid-19 blighting Victoria and threatening to re-appear elsewhere, that’s a prediction worthy of Nostradamus.

While Credit Corp proves resilient, other players in the listed sector have been sullied by operational and strategic missteps and – ironically – debt problems.

In the case of Collection House (CLH), shares in the Brisbane based stalwart have been suspended since February 14 as the company finalises a “comprehensive change program” including a recapitalisation.

The company has also pledged to reduce the use of litigation as a recovery tool; and better analyse the “vulnerability triggers” that lead to such legal stoushes.

In the first (December) half results released in June, four months late, Collection House wrote down the value of its PDLs by $90 million to $337m and reported a $67m loss.

However the company managed an underlying profit of $15.6m – similar to Credit Corp’s full year number.

Shares in the Perth-based Pioneer Credit (PNC) have been cocooned in market suspension since early June, after private equiteer Carlyle Group walked away from a proposed takeover in acrimonious circumstances.

That one’s headed for the courts

Pioneer in late June said it had made “pleasing progress” on debt refinancing negotiations. As with Credit Corp, the company saw debtor repayments reduce in March and April, before rebounding in May and June.

Pioneer has also been playing nice by refusing to default list or launch legal proceedings against any customer, with management resolving “to continue this customer treatment for the foreseeable future.”

Arguably Collection House is a recovery play if they can get their balance sheet in order. We’ll leave the complicated Pioneer Credit to those within the Perth bubble.

The safest bet remains Credit Corp, given its history of performing through the economic cycles.

Credit Corp shares touched a Covid era low of $6.25, having traded above $37 before the late February market meltdown.

Now trading just below $20 apiece, Credit Corp shares are above their levels of mid June 2018, when short seller Checkmate Research issued a scathing report which claimed, among other things, that Wallet Wizard was a de facto payday lending operation.

Credit Corp denied the accusation and - unlike so many other short attack targets – has emerged unscathed.

Credit Corp shares are well traded and volatile, regularly featuring the in the ASX’s daily list of the top 200 rising – or declining – stocks.

Credit Intelligence (CI1)

Hang on! There’s another smaller, ASX listed debt collection play that turns a profit.

The difference with the $34 million market cap Credit Intelligence is that it’s based in Hong Kong and its business is oriented to the former British colony, which might have avoided the worst of Covid-19 but is blighted by political strife.

The civil unrest has been conducive to business failures and this will only get worse.

Sagely, Credit Intelligence has sought to expand beyond Honkers, having bought two Singaporean businesses and the Sydney based Chapter Two.

Credit Intelligence reported a $1.25 million profit in the December half on revenue of $6.07m and even paid a div of half a cent.

Management forecasts a 420 per cent rise in 2019-20 net profit, to $2.6m.

Tim Boreham edits The New Criterion

tim@independentresearch.com.au

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