Investor Wag Informal Investment Insights

Revisited: Battle of the debt collectors

A year has gone by since I last did a peer comparison between Credit Corp Group (ASX:CCP) and Collection House Limited (ASX:CLH) - go read it if interested, much of it remains relevant today. The two companies have had share price appreciation of over 40% since, so certainly very happy shareholders from both camps.

There are some key differences in important fundamental indicators such as cashflow, debt levels and return on equity. But what I wanted to highlight today is how Purchased Debt Ledgers (PDLs) values differ between the two companies' balance sheets. These are debt collection companies - purchasing debt ledgers and writing them off (amortise) as debt is recovered is a big part of what they do. How they value and amortise these assets have a large bearing on reported profits.

Here are some figures and derived ratios from the FY12 report of both companies:

Collection House Limited

PDL collections: $78.04m to $88.73m (+13.69% year-on-year)
PDL amortisation: $33.07m $37.34m (+12.91%)
PDL purchasing: $49.00m to $61.00m (+24.49%)
Average PDL carry value: $154.07m to $173.34m (+12.50%)
Commission collections: $31.86m to $37.43m (+17.48%)
NPAT: $10.13m to $12.68m (+25.35%)

PDL Amortisation : PDL Collections from 0.4238 to 0.4209 (-0.68%)
PDL Collections : PDL Carry Value from 0.5065 to 0.5119 (+1.05%)
PDL Amortisation : PDL Carry Value from 0.2147 to 0.2154 (+0.36%)

Credit Corp Group

PDL collections: $205.29m to $230.40m (+12.23%)
PDL amortisation: $93.13m to $108.40 (+16.40%)
PDL purchasing: $92.60m to $91.50m (-1.19%)
Average PDL carry value: $147.21m to $137.60 (-6.53%)
Commission collections: nil
NPAT: $21.02m to $26.59m (+26.42%)

PDL Amortisation : PDL Collections from 0.45 to 0.47 (+3.71%)
PDL Collections : PDL Carry Value from 1.39 to 1.67 (+20.08%)
PDL Amortisation : PDL Carry Value from 0.63 to 0.79 (+24.54%)

Two things I've noticed:

  1. CLH have maintained PDL ratios while CCP have tightened further.
  2. There remains a large discrepancy between the two with ratios involving PDL carry values.

I'm of the opinion that Credit Corp has been sandbagging the bottom line over the last couple of years and even more so this year. By writing down the PDL carry value more aggressively, the company is essentially "storing" profits away. This may allow the company to continue to report reasonable profit growth over the next few years even while the Australian debt market is stagnating and overseas operations yet to make a positive contribution.

Interesting thought exercise. Question: How would you match the above PDL ratios between the two companies? Answer: By re-valuing the PDL carry value on the balance sheet. For CLH to match CCP's ratios they'll have to write down $120m from PDL assets - $185m to $65m. Likewise for CCP to match CLH's ratios, a $300m appreciation of PDL assets is required, taking it from $130m to $430m! Interesting isn't it? That's as much as I'm going to say.

Credit Corp's annual general meeting is on 8th November. The company has a history of announcing upward profit revisions during this event in prior years, so something to keep an eye on for interested parties.

Current Prices - CCP: $6.20, CLH: $1.02

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