Investor Wag Informal Investment Insights

Revisit: Reverse engineering Credit Corp's consumer lending

This is a follow up to my attempt at predicting the reported profit for Credit Corp Group's (ASX:CCP) consumer lending business: Reverse Engineering Credit Corps Consumer Lending. Please read it if you haven't, otherwise the rest of this post won't make sense.

Since my last post, I've received some feedback on the equation that was presented. All of which are much appreciated with valid points raised. Being someone in the "roughly right" camp, I've now made a slight tweak but have ultimately shied away from more complicated mathematically modelling to get a tighter fitting curve.

The revised equation includes an additional constant and the coefficients are tweaked accordingly:

p = 0.1968rb - 0.2918l + 0.4510

p = Net profit before tax (NPBT).
r = Reporting period. Full year = 1, half year = 0.5.
b = Average gross loan book.
l = Net lending for the period.

Which generates the following estimates for the previous four half year results..

Period Estimated NPBT (p) Reported NPBT % Difference
1H FY15 2.36584 2.9 -18.42%
2H FY15 -1.26092 -1.4 -9.93%
1H FY16 2.01578 2.1 -4.01%
2H FY16 6.27644 6.1 2.89%

It's a better fit than the previous equation which resulted in the percentage differences -12.60%, -28.40%, 21.41%, 15.44%.

A simple linear equation is not going to be the one expression to rule them all, and it's unlikely to be relevant in a couple of years time. The equation should be continually adapted with a rolling set of new data over time. This would be a simple way of adapting the equation to the growing loan book and changing economics, such as changing product mix and margins, of the underlying business.

Below is my revised FY17 estimate for the consumer lending division based on the latest commentary from management.

let b = 150.1, l = 45

p = 0.1968b * 150.1 - 0.2918 * 45 + 0.4510
p = 16.9

FY17 NPBT: $16.9m (Previous estimate: $19.3m)
FY17 NPAT: $11.8m (93% growth on FY16's $6.1m. Previous estimate: $13.5m)

It'll be interesting to see how the equation performs for the upcoming 1H FY17 results.

CCP last traded at $17.83.

Disclosure: At the time of publishing I own shares in CCP.

Reverse engineering Credit Corp's consumer lending

Credit Corp Group (ASX:CCP) reported FY16 results and put in another predictable performance that's slightly above the last guidance.

FY16 FY15 % Change
Revenue $229.0m $189.1m +19%
NPAT $45.9m $38.4m +20%
EPS (basic) 98.4 cps 83.0 cps +19%
Dividend per share 50.0 cps 44.0 cps +14%

The last time I wrote about the company, two years ago, I mentioned the consumer lending division would be the major growth engine and it alone would allow for satisfactory earnings growth over the following few years.1

The best part is that it contributed -$2.5m NPAT to the FY14 results due to the upfront provisioning (20-25% of value) of the loans upon establishment. As a result of this provisioning model, we're unlikely to see the real contributions to the reported NPAT until 2 years after the loan book stops growing (average term is around 1-3 years).

Assuming that Credit Corp can make a 16.5% annual NPAT return on the net loan book. If we conservatively estimate the net loanbook will hit $100m (gross ~$125m) in FY16 and flatline from there; Provided everything else stays the same, by FY18 CCP would have added a further $16.5m to reach an annual NPAT of $51.3m. A 47.4% increase from FY14's NPAT or 10.2% annually over the next 4 years.

Even while navigating the exit out of SACC, the company has still managed to beat my guesstimates ending up with a net loan book of $104m (gross $135m) for the end of FY16.

Due to the continued growth in loan book, along with the high upfront provisioning, the reported profits for consumer lending remain substantially understated compared to pro-forma performance. I believe NPAT equalling 16.5% of the net loan book is probably still not a bad guesstimate. But I want to explore this a bit further in this post.

Taking a high level view on consumer lending profitability, the larger the loan book is for any given period, the more money (interest payments minus costs and provision adjustments) is made. We also know that the more loans that are written during the period, the more cost is incurred from upfront provisioning. It can be all summarised by the following homemade equation:

NPBT = gross_loan_book * x - net_lending * y
p = bx - ly

Using the past two year's worth of half yearly numbers...

Period NPBT (p) Gross Loan Book Avg GLB (b) Net Lending (l)
1H FY15 $2.9m $72m $67.5m $16.2m
2H FY15 -$1.4m $100m $85.8m $34.8m
1H FY16 $2.1m $121m $110.5m $31.9m
2H FY16 $6.1m $135m $128m $23.2m

Giving us four equations to work with two variables to solve...

[1]  2.9 = 67.5x - 16.2y
[2]  -1.4 = 85.8x - 34.8y
[3]  2.1 = 110.5x - 31.9y
[4]  6.1 = 128x - 23.2y

If we solve all the combinations and average the results...

[1]+[2]:    x = 0.1289, y = 0.3580
[2]+[3]:    x = 0.1062, y = 0.3021
[3]+[4]:    x = 0.0960, y = 0.2667
[1]+[3]:    x = 0.1611, y = 0.4921
[1]+[4]:    x = 0.0621, y = 0.0799
[2]+[4]:    x = 0.0993, y = 0.2852

Average:    x = 0.1089, y = 0.2973

Giving us a rough equation to calculate profitability (NPBT) of Credit Corp's consumer lending division...

p = 0.1089b - 0.2973l   [Half year equation]
p = 0.2178b - 0.2973l   [Full year equation; the income section doubled]

p = Net profit before tax (NPBT)
b = Average gross loan book
l = Net lending for the period

If we make some assumptions for FY17 based on the latest commentary from management...

let b = 150.1, l = 45

p = 0.2178 * 150.1 - 0.2973 * 45
p = 19.3

FY17 NPBT: $19.3m
FY17 NPAT: $13.5m (121% growth on FY16's $6.1m)

If this is broadly accurate, then 16% of Credit Corp's earnings growth is expected entirely from the consumer lending division in FY17. Maybe this is a reason why the earnings guidance from management for FY17 is atypically aggressive (13% - 18% growth) for this time of the year.

Consumer lending earnings will always lag pro-forma performance when it's growing due to the way the company aggressively handles upfront provisioning for loans written. The division is not going to grow by 121% next year, it's just the accounting. The shift in earnings growth projections is not something that's happened in the past year, but the seeds of which were sown years earlier. Investors, with attention for detail, could have potentially put the clues together and have seen the earnings bump coming a couple of years in advance.

I'll close out with some commentary from management on this very topic...

The loan book has now reached critical mass, which means that Credit Corp can look forward to very strong profits and returns from the lending business.2


NPAT from the lending segment is expected to grow significantly.2

I'm expecting the same clockwork of earnings upgrades throughout the year...

CCP last traded at $15.15. Up 13% today.

Disclosure: At the time of publishing I own shares in CCP.

Software will bite at Telcos

Megaport Limited (ASX:MP1) is tech entrepreneur Bevan Slattery's 4th and latest IPO. Its ASX listing occurred on 16th December 2015, raising $25m in the process to fund a global expansion.

It's a company that helps organisations connect data centres with private high-speed fibre network links. The value they add for customers include process simplification, speed, flexibility and an open API. Megaport is currently established on the Australian east coast, parts of the Asia Pacific region and right now it's busily expanding to the United States and Europe.

Unlike Slattery's other ventures (PIPE, NextDC, Superloop) which are infrastructure heavy companies, Megaport is more likened to a Software-as-a-Service play. Once the company is established and of critical mass, it should be able to operate with relatively low levels of capital expenditure. It's a company that's all about domain knowledge, software and network infrastructure relationships.

I came across a question recently: "Why wouldn't the established telcos squeeze Megaport out with a similar offering?" When I began structuring the reasoning I impulsively started drawing comparisons with OzForex (ASX:OFX) and the question: "Why doesn't the big banks just squeeze them out?" Strangely enough, although completely different companies in different industries, both OzForex and Megaport have very similar structural advantages over the incumbents in their respective industries.

In essence the primary competitive advantage for both companies can be distilled down to possessing a global perspective.

The incumbents in the International Money Transfer (IMT) space are banks that are generally very nationally focused. OFX with an international presence is able to route money locally and net transaction flows. In turn delivering superior customer outcomes in simplicity, cost and speed. More details are available in my previous post on OFX.

Telcos are also very nationally or regionally focused. The value they deliver are bound to the network infrastructure they own and manage. If Megaport is able to execute on its global vision, it will translate to its own set of competitive advantages:

  1. Simplification and Abstraction. Connecting two Megaport enabled data centres works the same way every time. No need to work with different parties with different processes.
  2. (Aspiring) Global Presence. No doubt the aspiration is to be the one-stop-shop to connect any multiple locations in the world. Your office in Adelaide to your data centre in Melbourne to Amazon Web Services in Sydney to Google Cloud Platform on the US West Coast to Azure in Western Europe. An aspiration that will be extremely difficult for any one telco to compete with.
  3. Speed and Flexibility. A link is provisioned within 59 seconds. Altering bandwidth thereafter is just as fast. Pay-as-you-go billing rather than big upfront capital expenditure and long-term contracts. Having such agility will allow customers with greater flexibility in their specific use case. For example, expanding bandwidth temporary in the evenings for off-site backups. Much of this is achieved by using a Software Defined Networking (SDN) approach to the management of network links.
  4. Open API. An API allows other organisations to extend and integrate with Megaport's services. When international companies begin to investigate the orchestration of their global networks - partnering with a global company with a well maintained API will be key to the decision making. This will also apply to software developers/vendors in this space. The overhead of writing software to integrate with a heap of different national/regional network providers using different technologies/processes would be tremendous.

Due to these key advantages, it's likely to be other small SDN players, such as VC backed IIX, that will be the primary competitors to Megaport rather than large telcos. None of the current financials will make sense from a value investing perspective. It's a long-term bet on execution and significant market disruption. It's unlikely to be cashflow positive for some time so the ride will likely be a bumpy one.

MP1 last traded at $2.79.

Disclosure: At the time of publishing I own shares in MP1 and OFX.

No Country for Old Banks

International Money Transfer (IMT) services are all about transferring money from one country to another, often doing a currency conversion in between. The vast majority of this happens between banks, and in most cases the process is complicated, expensive, time-consuming and not a good experience. For those interested on understanding why this is so, I'd highly recommend reading Erin McCune's insightful article There Is No Such Thing As An International Wire.

IMT services is the primary business for Australian fintech up-and-comer OzForex (ASX:OFX). While large banks remain the incumbents in the market, OzForex and other non-bank players while tiny in comparison, are gathering steam. And with good reason. OFX has an international presence with international customers, specialise in IMT and are more agile to respond to change. This translates to a host of advantages:

  1. Having a dedicated local presences, only the initial and final hop of the transaction need to be managed. These are generally very simple transactions between local bank accounts and foregoes having to route through multiple banking parties with additional fees. This greatly simplifies the processes making for a better customer experience as the transactions are easier to trace and troubleshoot. The costs are also easier to predict and understand.

  2. A local presence also makes the transactions faster. Money in, and then money out - both transactions are local so most IMTs will take only around 2 business days. It doesn't have to route through an international banking network which can take most of a week. Faster is better.

  3. Having international customers means there are a constant flow of transactions between countries. For example, there are payments made from Australia (AUD) to the UK (GBP) and vise versa. In the case where the amount of transactions between the two countries matches, OFX would just route the payments and no cross border payment would occur. The popular term for this is "netting" or even peer-to-peer transfers. OzForex currently nets approximately 40% of all transactions and this helps keep costs down. Once again, it only works if you're a global player.

  4. Organisational agility. Being faster and with less to lose than the big financial institution allows for the execution of new product/services such as a global transactional mobile app and API integration with software-as-a-service accounting software Saasu. The latter becomes especially important if in the future companies lean towards wanting to transact with accounting portals such as Xero or Saasu, rather than through internet banking. Many incumbents won't be able to respond with technology or pricing.

Of all the smaller non-bank IMT global players, OzForex is one of the best placed. Doing over AUD$16 billion worth of turnover and 700k+ transactions annually, it has the size to address ever increasing regulatory demands where others cannot. While the loss of relationship with Westpac earlier in the year was not ideal, OFX maintains around 15 banking relationships globally and can transfer money in 47 currencies across 190 countries. Small enough to be agile, without the historical baggage nor the fear of cannibalisation - yet big enough to deal with regulatory requirements and have the necessary scale - OzForex appears to be one of the goldilocks players in massive global market measured in the trillions.

It has all the attractive properties of a "tech" company - high ROE, capital light, strong cashflows, operationally leveraged, etc. And with tremendous growth momentum highlighting that it's doing something right...

Active Clients Turnover NPAT

At the latest AGM event last week, management unveiled an "accelerate" strategy with a goal of doubling revenue to $200m by 2019 and in the process increasing profits by a larger percentage. I personally believe that seizing the moment and hunting growth is the correct move. The financial goals, although exciting, also feel quite achievable. With a P/E in the low-20s, this is not a typical value play, but a long-term bet on execution and significant market disruption.

OFX last traded at $2.59

Disclosure: At the time of publishing I own shares in OFX.


Having been on vacation for the past few weeks, and I've since had some time to reflect on this blog. To gain an understanding on why I've struggled to post new materials over the last year or so. It comes down the fact blog style has always been news driven, investment thesis driven and with background information on the companies mentioned - much of which I'm no longer hold interest in.

So I'm pivoting. Expect less structure, news driven and company backgrounds. More thoughts, insights, data and randomness. Hopefully through this conscious effort to change, this blog will become more insightful for you to read and more interesting for me to write.

Credit Corp's consumer lending well on the way

Credit Corp (ASX:CCP) reported FY14 results on the 5th of August coming in at the top of the outlook range to wrap up another strong year of earnings growth.

FY14 FY13 Underlying % Change
Revenue $174.0m $138.3m +26%
NPAT $34.8m $29.9m +16%
EPS (basic) 75.4 cps 65.2 cps +16%
Dividend per share 40 cps 37.0 cps +8%

The core Australian PDL business remains strong but will likely be supply constrained going forward. Credit Corp's US operations is at the ready but currently running in a subdued state, waiting for supply and prices of PDLs to normalise following regulatory changes. Although much of the future growth story does sit with the huge potential of the US PDL market, it'll be the consumer lending division quietly driving growth over the next few years.

Consumer lending has really come on fast over the last year, adding $48.6m to the gross loan book with $31.6m in the last 6 months. In a blink of an eye, it's grown larger than Thorn Group's (ASX:TGA) CashFirst and is now a similar size to Money3's (ASX:MNY) secured and unsecured loan operations. Management is forecasting another $40-50m in net lending over the next 12 months, which will make it comparable in size to Cash Converter's (ASX:CCV) Australian personal loan operations. Not bad for a new business that's only three years old and done without a single capital raising!

The figures in the above graph is very rough, based on financial reports from the individual companies.

The best part is that it contributed -$2.5m NPAT to the FY14 results due to the upfront provisioning (20-25% of value) of the loans upon establishment. As a result of this provisioning model, we're unlikely to see the real contributions to the reported NPAT until 2 years after the loan book stops growing (average term is around 1-3 years).

Assuming that Credit Corp can make a 16.5% annual NPAT return12 on the net loan book. If we conservatively estimate the net loanbook will hit $100m (gross ~$125m) in FY16 and flatline from there; Provided everything else stays the same, by FY18 CCP would have added a further $16.5m to reach an annual NPAT of $51.3m. A 47.4% increase from FY14's NPAT or 10.2% annually over the next 4 years.

Consumer lending profits will begin as a drip, but will start to flow strongly. In a blink of an eye, Credit Corp has established a new pillar to compliment its core PDL business.

CCP last traded at $9.72

Disclosure: At the time of publishing I own shares in CCP.

Post updated 21/08/2014: Updated FY14 numbers of the loan book chart

  1. "Credit Corp has determined that an acceptable return for a business operating in our sector represents an annual Return On Equity (ROE) in the range of 15 to 18 per cent at a modest level of gearing." - CCP 2013 Annual Report, page 5 

  2. "Credit Corp's lending targets the same rate of return as its PDL acquisitions." - CCP FY14 Financial Statements, page 10

Credit Corp HY14 Update

Credit Corp Group (ASX:CCP) released its HY14 report and presentation on Thursday last week.

  • Underlying revenue up 25% against the comparable previous half to $84.1m
  • Underlying NPAT up 18% to $17.2m
  • Underlying EPS up 17% to 37.4cps
  • Dividend per share for the half is 20cps, up 25% against the underlying DPS of 16cps

These are all "underlying" figures as this time last year the company had a favorable once-off legal settlement that boosted the bottom line profits and HY dividend.

Full year (FY14) guidance numbers have also been updated:

  • PDL Acquisitions: $125-135m ($110-$120m, a previous guidance issued Nov 13)
  • NPAT: $33-$35m ($31-33m)
  • EPS: 71-76cps ($67-71cps)

Main points of interest:

  • The core business of the Australian collections operations is going well and is still driving the majority of growth within the company. Being the largest debt collector in Australia, and with prices of PDLs remaining quite high, growth will not come simply from here on end. However with record purchases in the past two years, profits are well positioned to grow in FY15 and perhaps even FY16.
  • The consumer lending book grew a massive 84% over the past 6 months to $35m. In a space of two years, consumer lending has grown bigger than that of Thorn Group's (ASX:TGA) consumer loan book of $23m (as at Sep13). In comparison Cash Converter (ASX:CCV), the largest player in this space, has an Australian personal loan book sitting at $92m (FY13 results). The company is forecasting that consumer lending will begin contributing profits in FY15. With the phenomenal growth rate and the provisions expense being front-ended on these loans, profitability just might surprise some people over the next few years.
  • The company has built up a decent sized collections operation in the USA. The US PDL industry is a state of transition with increased rules and regulations on how PDLs can be re-sold and managed. As a result the financial institutions are trying to comply with these regulations and many are withholding supply until they can get it right. Limited supply is causing PDL prices to skyrocket and those in the industry are struggling. Credit Corp will just need to wait this out and be ready to pounce when the conditions begin to revert back to the mean.
  • Page 12 of the presentation is an especially good slide. I've written in earlier posts of the importance of monitoring PDL collections, amortisation and carry value ratios for collection companies. Management should be commended for educating investors on these key indicators and maintaining their PDL amortisation discipline.

Overall I really like the half yearly result. A good FY14 result is already in the bag. The elevated level of PDL purchases in recent years and the emergence of the consumer lending division will underpin growth in FY15. This should buy enough time for PDL prices in the US to settle down, in which time it could very well be the catalyst for the beginning of another golden age for Credit Corp.

Trading at a forward P/E of around 13, growing at double digits and with a strong management team with proven results - it's also reasonable value in the current market.

CCP last traded at $9.46.

Disclosure: At the time of publishing I own shares in CCP. My holdings were topped up on Thursday after the release of the HY14 results.

Beyond International Limited (ASX:BYI) FY13 Results

Today the company reported FY13 NPAT and EPS 9.6% above FY12's results. This is slightly below the low range of the guidance given earlier this year of a 10-15% increase. As such, a few investors headed for the door which saw a large 9.44% drop in share price by day's end.

The slight miss in forecast can be entirely attributed to the continued sluggishness of the digital media division BeyondD. Not only did it not turn a profit, but it also took a net -$350k hit on EBIT (-$650k write down of goodwill but +$300k reversal of earnout payments).

Other points of interest:

  • The home entertainment division continues to struggle. No surprise here, it's going to be all about managing the decreased demand for physical media over time and the transition to, likely less profitable, digital platforms.
  • Its core business of making TV shows and distributing them is going well. Revenues increasing in the two divisions by 10% and 23%, and EBIT up 4% and 51% respectively. The margin compression of the production and copyright segment is of slight concern, but it could be entirely a timing issues.
  • 34% of the company's revenues is USD denominated. A falling AUD generally has a positive impact. However the company does enter currency hedging contracts for new productions and this saw a net impact of -$200k. If the AUD remains at its current levels or continues to fall against the USD we will see additional positive impacts. However due to hedging, the impacts will likely to be always slightly delayed rather than immediate.

Overall, not too much to complain about. It's has once again strung together another good result. And it's still attractively priced (P/E ~10.5) for a growing, foreign currency exposed, non-mining-related company in this current environment.

As discussed previously, the biggest challenge and opportunity for Beyond is the changing environment for content producers. If one can make the right moves, it may work out very profitably. Kevin Spacey has something to say on this topic also...


BYI last traded at $1.63.

Disclosure: At the time of publishing I own shares in BYI

Colorpak Limited (ASX:CKL) FY13 results

Not too much as happened since we spoke last about Colorpak. The FY13 results came out last week and with a strong finish to the year, it came slightly ahead of what I was expecting.

FY13 ($000) FY12 ($000) Change
Revenue 171,676 191,661 -10.4%
EBITDA 18,206 16,735 8.8%
EBITDA % 10.6% 8.7%
NPBT 10,743 9,252 16.1%
NPAT 7,494 7,660 -2.2%
EPS (cps) 9.19 9.39 -2.1%

Revenues were down due to the cut of some unprofitable contracts and the loss of some customers. This was to be expected. However this was more than made up for with efficiency gains from the consolidation of operations, process improvements and re-negotiation of unfavourable contracts inherited from the Carter Holt Harvey (CHH) acquisition. As a result, the EBITDA margin was up and the underlying profit was up 16.1%. Overall EPS was down due to some once-off tax benefits in FY13.

For the next financial year, the company will be doing it's final plant rationalisation in Australia with the closure of the Mt Waverly plant in Victoria. This is expected to have an once off cost of $2.4m which will impact the reported earnings for FY14. But it will have an underlying benefit and an impressively quick payback period of less than 12 months.

Management is expecting flat sales but continued underlying growth from improved margins. Underlying earnings growth are expected for both FY14 and FY15.

Unexciting but predictable and management executing well to plan. Not many companies trading at a trailing P/E of 9 and staring down at earnings growth for the next two years at the moment.

There has also been speculation that with Amcor planned de-merger of its Australasia and Packaging Distribution (AAPD) business, there may be some corporate consolidation to follow.

CKL last traded at $0.82.

Disclosure: At the time of publishing I own shares in CKL.

Dodging bullets

From a post made on 20th February 2013

Ecosave (ASX:ECV) – $1.39
Lumpy. From an outsider it looks as though there is a possibility of missing the bullish prospectus forecasts. Have since decided to watch from the sidelines.

Looks like I wasn't too far off with Ecosave (ASX:ECV) making an announcement today after market close.

In the Company’s Initial Public Offering prospectus, Ecosave gave a FY2013 forecast of net profit after tax from operations of $3 million. The company now expects to report a net profit after tax from operations in the range of $1.6 million to $2 million1 for the FY2013 period.

Lucky to have dodged a bullet.

ECV last traded at $1.61