Battle of the debt collectors11 September 2011
It's always a good exercise put direct competitors together and see how they stack up. Credit Corp Group (ASX:CCP) and Collection House (ASX:CLH) are the two largest publicly listed debt collection companies in Australia.
On the surface it's easy to put a case forward for Collection House. Fourth year of profit growth, 25% growth in underlying profit before tax year-on-year and an aggressive outlook with the company aiming to increase ledger purchases significantly (to $60 - $70m) in the next year. In fact the company states for FY12 that its ledger purchasing will be "greater than any amount announced by other debt buyers in the Australian market". And it's also extremely cheap trading at a P/E of 7 and dividend yield of 8.5% fully franked.
Credit Corp Group have also had a good few years, posting up NPAT growth of 55% in the last year. It is trading slightly higher on the P/E scale coming in at 9 with a dividend yield of 4.6% fully franked. Although with a more subdued initial forecast of reduced ledger acquisitions in FY12, some may argue that CLH may be of better value at present.
The most interesting numbers for these companies are their debt ledger numbers - how much they have on their books, how much are they collecting and how much they're writing off each year. It's important to note at this stage that Credit Corp is a 100% ledger collections company while Collection House is two-thirds ledger collections, one-third commissions based collections.
The average ledger assets on the balance sheet is similar between CCP and CLH, at $147m and $152m respectively. With similar amounts to deal with, one would expect the collections made to be also similar. But here's the surprise: Credit Corp collected more than 2.5 times than that of its competitor with $205m against $78m. CCP also has a higher amortisation/collections ratio of 45.4% verses 42.4%. And they wrote down significantly more of their ledger assets at 63.2% of their carrying value verse CLH's 21.5%.
The large discrepancy in collections may be due to Credit Corp being a much more effective collector of ledger assets, though I highly doubt they'd be a whole 150% better. Another reason, and probably one that plays a much larger role in the numbers, is either Credit Corp are too aggressive at writing down their ledger values, Collection House being too slack or a combination of both. Should be it be more the former, then CCP have been understating profits. If it's more of the latter, CLH have been overstating theirs and write-downs will likely follow.
Other points of interest between CCP verses CLH:
- ROE is 20% verses 10%
- Debt/Equity ratio (long-term interest bearing debt only): 0% verses 77%
- Intangibles: $0.8m verses $22.8m
- CCP repaid $18.2m in borrowings while CLH borrowed an extra $7m during FY11.
One is just about debt-free and going great guns, and other is prodding along with high debt and potentially in danger of significant write-downs. If Collection House is to meet their target for the year of $60 - $70m ledger purchases, they will need to borrow further. And I wouldn't blink an eye-lid if they hit up the market with a capital raising.
It's not hard to see which one of the two companies I'm holding.
While it's easy to look at the headline figures and pump it into a discount cashflow formula, obtain an intrinsic value, and postulate that Mr. Market got it wrong and the price will eventually catch up to the value - ultimately, it's an extremely dangerous way of investing. Thorough investigation of the numbers and understanding of the company is always necessary to get a more accurate picture. But if you still don't understand what's going on, you don't have to swing!
Prices at Friday's close - CCP: $4.30; CLH: $0.73.