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.