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US Opportunity To Drive Growth At Credit Corp

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Credit Corp ((CCP)) has impressed brokers with the growth rates in its debt purchasing business over recent years, having grown earnings per share at a compound rate of around 10% as well as diversified its business.

The company's Australian purchased debt ledger (PDL) business has been the main profit driver since listing and operations have now expanded into the US, while a consumer lending business has also been established.

Ord Minnett expects these two businesses to drive all the growth in FY18 as the Australian PDL market is affected by increased capital and price inflation. The broker considers the consumer lending business one of the best examples in the Australian market of the company transferring its core competency into a complementary line.

While assessing the earnings outlook as robust, pre-result strength in the share price suggests the stock is now much closer to a market multiple and this prices in the positives, in Ord Minnett's opinion. As a result the broker's rating is downgraded to Hold from Accumulate with a target of $22.

First half net profit growth was 18.2% while full year guidance of $62-64m has been confirmed, up 12-16%. PDL purchasing guidance is upgraded to $190-200m, with $190m already contracted. Two PDL tenders will take place in the second half and therefore, Morgans notes, some potential upside exists to expectations if the company is successful.

The broker suspects competitive pressure may start to affect domestic earnings in FY19 yet still expects Credit Corp to deliver over FY19/20, just at marginally lower rate. Moreover, the company has potential to scale up its contingent collections division via acquisitions. Growth is expected in consumer lending and US debt, delivering a 10% growth rate in the medium term.

Morgans believes that company can sustain a premium to its historical PE, given its growth profile and a substantial opportunity in the US. Hence, an upgrade in recommendation to Add from Hold.

Canaccord Genuity agrees the domestic business faces a challenge in FY19 and notes management does not expect domestic collections to maintain a growth rate of over 4% in the second half. Domestic purchasing levels are falling as the company elects not to overpay for debt in the current market.

The broker notes evidence in the results that staff were working the back book of aged debt harder following the big purchasing years of FY16 and FY17.

Canaccord Genuity does not discount all potential upside in FY19, as there are significant forward flows that may be up for grabs, and any fall-out from competitors overpaying for acquisitions could mean domestic prices ease.

US Expansion

The company purchased $30m of US PDL in the first half and expects to achieve $55m in FY18. At full capacity the company's new collection facility in Salt Lake City should enable around $80m of US debt purchases, Canaccord Genuity calculates. A second site is also being considered over the next 12 months.

The broker suspects this could mean FY19 ends up being a "high single digit" growth year rather than the "double digits" the market has become accustomed to. This may also explain why the stock slipped around -8% following the first half results.

Regardless, the broker considers the market opportunity is unchanged and the plans to build a US operation of similar size to the Australian business should mean profits lift significantly over the next four years.

Australian operations generate around $45m in net profit annually while the US business has just moved to break even. Moreover, the company has over $100m in balance-sheet capacity to exploit opportunities.

The broker acknowledges the expansion will require additional upfront costs and is unlikely to be fully utilised for some time. Management is also trialling new loan products, specifically an automotive offering and small business lending. Canaccord Genuity maintains a Buy rating and price target of $22.25.

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