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CCP - Credit Corp Group

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Thanks Ves, I was pretty sure that the change in provisions were the cause but couldn't find the link.
 

Been having a bit of a look with an eye to buying back in (would have to be a swap with TGA for me)

Looks like I get to play devils advocate again.

I'm a bit dubious on the same target return claim - yes they may target 16-18% on each pdl purchase but the collections / PDL balance is closer to 2 then 1 which increases the per-annum return.

Gross loan book of 63.6 Million and provisioning of 16.6 Million. Either they are over provisioned or they are going after the lowest of the subprime market – Not hard to increase the loan book to that market, can they get it back?

Writing off 26% as bad loans means they have to make an interest rate of 42-44%pa on the good ones to get the net 16-18% they are after.


Has anybody got their head around the quality of the loans they are making and whether the provisioning is likely to be accurate? The numbers are not going to reveal the picture until the loan book growth slows by which time the goose will be cooked one way or the other.
 

Over provision in early days just to be sure .. I think they will revise the provision down as the loan book mature and they get some concrete number out of it

http://www.moneystart.com.au/ 5K loan over 36 months cost you 23-24% pa which is comparable to credit card cash advance ... Most other lender cant do it at this rate for credit impair customers but credit corp can

credit corp has Proprietary analytic system that took years to develop and collect data and this is their competitive advantage, no one has this system like they do, so they can accurately price PDL and credit impair customers with high level of accuracy.

How do they manage to know when to buy and what to buy at what price to get incredible high return when most cant? .... the answers lies in their analytic system.

a case of boring business using technology to their advantage pretty much like DMP uses technology for online ordering and social media interface
 

As usual, I am probably placing too much trust in the hands of managers - but the presentation spoke about rapidly initiating the loan book for the Car Loan product before a current and deliberate "pause" in growth to allow them to see how the book seasons. The CarStart segment makes up 13% of the lending operations and is the longest period (3-4yrs vs 0-1yr or 1-3yrs).
I think that the above actions, as well as CCP's reputation for being conservative with profit guidance would lead one to believe that if the provisions were not accurate it would be because they are over-provisioned.


This aside, it's a wait and see approach for me...I have been burnt by management teams before for placing too much trust in them, so I am (attempting to) not walking in blindfolded to the risks.
 
ROE said:
5K loan over 36 months cost you 23-24% pa which is comparable to credit card cash advance ... Most other lender cant do it at this rate for credit impair customers but credit corp can
Click to expand...

Actually
$5,000 over 36 Months = Comparison rate of 38.47%
$1,000 over 6 Months = Comparison rate of 62.78%

http://www.moneystart.com.au/files/other/moneystart_ComparisonRateSchedule.pdf?v=0001

That’s pretty much where the rest of this industry is at.


I note that TGA mentions that their loan approval rate for cash first is only 15-20% of applicants. They have increased their loan book in this area by only 2 Million.

I would rate TGA higher in credit assessment for this market – it’s their core constituent.

CCP’s core is buying impaired debt that has arisen from a much wider cross section of the credit market. Their collection skills though should be valuable when it comes to trying to get the money back – except you can’t get money out of a stone – the skill in this market segment is assessing the application properly in the first place and having the smallest write off component.

What sort of loan approval rate did CCP have to get their 28 Million dollar loan book increase?

87% of CCP’s loan book is in the unsecured dog end of the market, which is extremely exposed when say compared to TGA who is far more diversified in their loan book.

In relation to CCP’s car start product (the other 13% of the loan book) - I noted that TGA have indicated that their CAR lending trial appears to be a no goer. So not sure what will come of CCP’s hiatus on this product.

Any rate that’s enough devil advocates work from me. Given the relevant stock prices I think I will stay with TGA until further information arises as my exposure to subprime credit.
 
craft said:
Actually
$5,000 over 36 Months = Comparison rate of 38.47%
Click to expand...

How did you end up with 38.7% ?

$5000 over 36 months total repayment of $8497

$8497 - 5000 = $3497 (interest)

3497/5000 = 70%

70% / 3 = 23.3% p/a
 
ROE said:
How did you end up with 38.7% ?

$5000 over 36 months total repayment of $8497

$8497 - 5000 = $3497 (interest)

3497/5000 = 70%

70% / 3 = 23.3% p/a
Click to expand...

I used their figures – see link in post.

Besides repayments of $236.03 over 36 months on $5,000 is an annuity calculation. Which comes out to 3.2% per month or 38.4% per year. The comparative rate also needs to take into account one off and ongoing fees and charges.

edit

As an aside - the comparative rate which is a legal requirement to show was quite tricky to find on their site. right down the bottom on a non- highlighted link.

Second edit - that link to the table is now gone and it now says in small print at the bottom that the comparison rate is 41.77% based on $2,500 over two years
 
Curious myself. So played around a bit to see if I could re-create the numbers.

To find the interest rate open up Excel and use the RATE function. Rate(nper,pmt,pv,fv,type,guess)

Nper = number of periods. 36 in this case.
Pmt = Monthly repayment. $236.03
PV = Present value. $5000
FV = Future value. $0 since it will be paid out by end of 36 months.
Type = type of loan, 0 for payment at beginning of month, 1 for end. I assume it is the end in this case.
Guess = what you think the Interest rate is. Just type in 38%, if you leave it blank it starts at 10% by default.

Excel spits out 3.4354% for me. Which is 41.225% annualised.

If I change type to 0, it comes out as 3.2036% or 38.4435%.

You could alternatively try to use algebra to figure out the interest rate based on the annuity payment formula. But I wouldn't recommend it.
 

except you got your 0 and 1 around the wrong way for beginning and end of period - [or I have been doing it wrong all this time]. Pmt needs to be entered as a negative - but you must have done that to get the right result.
 
craft said:
except you got your 0 and 1 around the wrong way for beginning and end of period - [or I have been doing it wrong all this time]. Pmt needs to be entered as a negative - but you must have done that to get the right result.
Click to expand...
Yep, just realised I got the beginning (type 1) and end (type 0) of period payments the wrong way around.

And yes payment is a negative in this case. It is of course a positive if you are using the formula to calculate the interest rate on an annuity that you are adding to (like an investment) rather than depleting (like a loan).

As for the long-hand method, did learn it at university. I cannot remember it off the top of my head, but I certainly know where to find it if required.
 
Hi Craft,

Thanks for raising the points. I hold shares in both TGA and CCP.
Having a look at TGA's latest presenation provision for the loan book is at 11.2% of net receivables. On a gross basis that should be a bit lower so probably closer to 10%.
On the face of it, it looks like CCP is provisioning at a rate of 26%. This is just another testament of how wonderful this result actually is. TGA has had a couple years of no growth due to the ramping up of it's lending businesses. CCP seems to have been able to maintain profit growth thanks to their main debt collecting business and with the lending side set to be profitably next year, things are looking very good. TGA is also looking very good to deliver profit growth soon.

A 3 year loan that generates 38.4% pa for 3 years is very profitable even if you only receive 74% of those payments. This is a basic assumption based on their provisioning ratio and might be wrong, depending on how the amortised cost of the receivables was calculated. Looking at collections/receivables doesn't show the true picture as collections are only received over time. If all your loans were written on the last day then u would have a very low ratio. With rapid growth in the loan book, we don't really get a meaningful comparison.

I agree that it is a little concerning contrasting how fast CCP has generated it's loan book compared to TGA which may mean they are accepting lower quality borrowers. It does seem that they are provisioning conservatively enough though. There are other factors involved as well though, I think CCP taps into it's database of debtors to offer loans to.

Management have a record of being conservative with forecasts over the recent years so I hope this is the case here as well and actual impairment losses are less than the provisioning. If lending produces the same returns on capital as debt collecting and they maintain this level of growth in the loan book then it it might be the main business soon.
 

Hi Hidden Cow

It’s nice to have your input.

TGA provisions as the loans are known to become impaired so balance date provisioning is not comparable unless you knew the duration of TGA's loan book. CPP’s performance this year given the upfront provision is impressive, there is no doubt the PDL business when firing is a cash cow, but the forecast of 70-90M in PDL purchases next year indicates things are getting tougher even here in Aus. Personally I think they are rushing to fill the hole by building the loan book too quickly (which has inherent risk to loan quality) – but I also don’t expect the market to agree with me (at least in the short term)

Hope you don’t stay to hidden in the future

Cheers

Ps

I understand radio rentals or cash converters cross sell but who goes to a debt collector for a loan? I suppose the answer is the same people that are happy to pay 40%pa for loans. I guess you have to be in their shoes. CCP certainly haven't had any trouble finding customers to lend the money too.
 
I sold today. I had a better look at this after my initial comments and started having doubts in my head and with better uses for the money it wasn't hard to twist my arm. I went back and read my notes from way back in 2009 when I bought CCP. What was the issue then? Management had used debt to go on a PDL purchasing spree. It all looks a little too familiar for my liking and to be honest, it looks as though the glory days in PDL's are over. Craft's point is very good, these guys aren't TGA and success is not guaranteed in lending. TGA is a sub-prime lender that happens to flog flat screen teles and is moving into cash sub-prime lending. CCP is a debt collector that wants to move into sub-prime lending. Ordinarily you'd expect the company with the experience to go into it more aggressively, the fact they are not speaks volumes about both companies. No doubt I'll get a paddlin' from the market as the shares go higher and higher.
 
good luck may you deploy capital well elsewhere

from my observation someone is building a position in CPP without letting
the market know ...so you could have sold at least 5% higher from yesterday
if you was to delay the sell decision.

I continue to hold
 

Thanks craft, I've been lurking around for quite a while and your posts have always been informative.
I'll have to check TGA's reports more closely to see how much of their loans they are providing.
There is only so much info that is disclosed there though.

I agree with you that the lending business is definitely more risky than their established debt collecting business. This is why I am pleased so see such a high level of provisioning. For both TGA and CCP, it seems lending is the area with the most potential for growth. There just seems to be a limitless supply of people wanting to borrow money in Australia. Maybe this will lead to more PDLs in the future?!

I read on a forum somewhere about a person who had finished paying off their debts to credit corp and were offered a new loan. It seems like they are definitely targeting their existing contacts. With 7x% of revenuing from the debt collecting being through payment plans, it makes sense. Try to extend the regular payments with new loans.

I think where my opinion difers from yours is CCP's capability to assess risk in the sub prime space. I think the businesses are all very similar at the core, that is being able to collect revenue which exceeds the cost of obtaining the receivable. Whether that receivable comes from providing the loan to begin with, providing a tv or buying the receivable it all involves an assessment of risk and likely returns.
 


Hi HC

Nicely summed up

Our opinions probably don’t differ that much.

Don’t forget I was playing devil’s advocate – I’m not out to trash CCP just to highlight some inherent risks. I’m not saying the risks around CCP should not be taken on by investors – just trying to highlight what they are. If management get it right CCP should do very well. The company has had one almighty lesson in the past about overpaying for risk and hopefully a lot of the hard earned lessons are ingrained in the risk taking culture.

Personally I have been in and out of CCP quite a few times. I am risk averse and have never been able to look past my inability to get full vision on the quality of the PDL ledger as an outsider – Don’t tell the techies but I overlay my views on CCP with the market action and only hold when I’m not fighting the market. (That in the last 5 years has cost me compared to just buying and holding)

I’m probably nervous enough now to ignore the market if it takes CCP on a new upswing – at least until the loan book matures a bit. But that’s not saying I no longer like the company fullstop.

CCP and TGA have merged close enough together in their businesses that I don’t see any benefit in holding both. In choosing between the two I prefer TGA at the moment based on my perception of inherent risk and market pricing.

Cheers

Ps

I’m often wrong. (or at least early enough to be indistinguishable from wrong)
 
Hiddencow - your user name is uniquely interesting - as are your posts, welcome to ASF.

Some great points put forth by you both.

Have just updated some of my charts and thought I'd present them...CCP does show a few of these in their presentations, but I have given a longer timeframe for a bit more reference of how new management is performing (or coping/reacting with market conditions) compared to the old management.

The first chart shows the implicit multiple that is achieved. Evidently, CCP was either under amortising pre-2009, or the market was much more generous in the prices it offered. A little from column A, a little from column B appears to be likely I think...
It is comforting that under the stewardship of Thomas Beregi the multiple has remained relatively flat despite conditions becoming much tougher in the PDL market - indicating that they are not willing to compromise on their returns by paying too much....


The next chart shows the PDL turnover ratio. In order to remain competitive CCP has had to get better at what they do. Many times I think about businesses with a competitive advantage that have it tested at certain points in the business cycle. With the PDL market appearing pretty competitive at the current time, one might think that CCP is having their competitive advantage 'tested' currently. ROE often points out that CCP has a competitive advantage in their analytic system which allows them to price debt better than the rest. Perhaps this system has been improved moreso over the last couple of years as they have searched for efficiencies to counteract the increased prices they are forced to pay for PDLs. (I do note that the expansion into new industries of debt collection may also have affect on this ratio).



A question that I have been pondering for quite a while, is whether or not the PDL market will stay competitive - or whether it has the potential to revert back to the conditions that existed a few years ago. The cat seems to be out of the bag with the number of industry entrants that have honed in on the segment, so for the foreseeable future it appears that any excess returns in this particular segment will be hard to come by. This may not be the case forever though, a shock event to the sector that takes out a few of the more risk tolerant players could change the market landscape. I am quite young and acknowledge that a major weakness in my investing is that I have not had the experience of living through and experiencing multiple major business/investment cycles.

A final chart shows that CCP continues to get more accounts onto payment plans. The reduction in purchases may be indicative of this, however management also stated they are suffering from a reduced share of forward flows - hence I think this is pretty impressive.

 
Craft always good to have frank discussion whether it is negative or positive on a business
I dont mind at all .. keep it up
 
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