Forum Archive Index - August 2000

["daniel" <DANIEL.ST@xtra.co.nz>]

STRENGTHS
Leading Participant in a Fledgling Industry - While CCP remains relatively small in market capitalisation, it has a leading reputation and an ‘incumbent advantage’. This has been built over its eight-year operating history and the recently successful tender for large debt ledgers, such as Westpac’s $40 million-plus debt ledger. This should be further augmented by the imprimatur associated with an ASX listing.

The table below shows that CCP will be the largest, ASX-listed company in the debt ledger purchasing market in Australia. Moreover, within the debt ledger purchasing market, competition remains quite concentrated with management consider the six participants listed below as the only competition for debt ledgers. This could become further concentrated, given CCP’s $40 million-plus Westpac debt ledger purchase and the fact that other lenders may be less inclined to offer debt ledgers to Alliance, given CBA’s recent shareholding. With regard to Collection House, it is a newer participant in the debt ledger purchasing market, having only recently bought the AGC debt ledger (approximately $300 million in size), which we believe was for a low fraction of the face value, given its lower expected quality.

	Books	Face Value	Years in Operation
Credit Corp Group	9	Approx. $126m	8
Alliance	0	0	1
RMG (Frontier)	0	0	0
Consumer Protection Services (CPS)	1	Approx. $20m	1
Debt Purchase Australia (DPA)	3-5	Approx. $10m -$20m	4
Portfolio Management Group (PMG)	3	Approx. $20m - $30m	3
Credit Solutions Australia (CSA)	0	0	0
Collection House	1	Approx. $300m	1

Source: Credit Corp Group Limited (estimated)

Strong Balance Sheet - Following the capital raising encompassed by this IPO, and the anticipated cash flows brought about by its latest purchases, CCP will be one of the better-positioned participants in terms of capital resources. This will ensure that it is well poised for the acquisition of additional debt ledgers, which are most often sold via tender.

Experience - CCP has shown a successful track record of being able to acquire debt ledgers at an appropriate price to derive consistent, attractive returns for its shareholders.

Barriers of Entry - While traditionally the mercantile agency business has little barriers to entry (as evidenced by its 600 or so small players), risk analysis of debt ledgers and their purchase is highly specialised, and also requires access to sizeable capital resources. Also in CCP’s favour are its long-standing relationships with major financiers such as Citibank, which give it some protection over newer players, with financiers concerned that some smaller agencies will not seek to protect their brand in the collection process. This trustworthiness can give CCP a competitive advantage over potential entrants, as debt ledger sellers may actually accept lower bids from CCP, due to a lesser likelihood of mismanagement of a client relationship. There are also considerable resource barriers to entry, as there is a requirement to finance the initial ledger purchase, which involves an up-front capital commitment and adequate internal procedures, systems and staffing.

Virtually "Cycle Proof" - The economic cycle can benefit CCP in both an upturn and a downturn. In an upturn, there is normally ‘loose’ credit provision, which results in credit expansion (and hence more under-performing loans) and at the same time improving circumstances for a larger proportion of debtors, which can make collection easier. Conversely, in a downturn, the business is relatively advantaged by the 'annuity' nature of the collections, being periodic payments, which normally suffer less than the broader credit-provider market: at the same time, there is a commensurate increase in non-performing loans, which actually provides additional 'stock' for purchase by CCP.

Ability to Diversify or Expand – The inability of mercantile agents to diversify across to the debt purchase market is not a symmetrical barrier to CCP, which has the in-house systems and expertise to seamlessly enter into mercantile and "factoring" markets and in fact has a licence to do so. Factoring and mercantile firms are in a period of consolidation, and are trying to achieve scale by merging (i.e. the BCH/DAD merger, and the coalition of 16 mercantile firms into RMG). As such, CCP can position itself to take advantage of the highly fragmented state of the broader debt market going forward and could in fact use its listed status to acquire smaller players.

Staff Experience - CCP has a stable team of experienced staff. This team will be expanded following listing, with up to an additional 15 full-time collectors and legal support staff being employed, as well as a Chief Operating Officer. This will expand collection resources considerably and also provide synergistic benefits across the overall larger universe of outstanding debts.

Proven Historical Performance - CCP has demonstrated proven: collection expertise; location expertise - finding 'skipped' debtors; legal expertise - understanding regional legal differences; bringing 'stat barred' accounts back from the bar; obtaining judgements to extend the workable life of the asset; systems expertise and high corporate ethics as evidenced by its repeated success as a debt purchaser. With regard to profitability, CCP has also shown an excellent return on invested capital to date, with the total invested capital for CCP being well covered by sufficient cash flow to fund operations and cover the purchase of all ledgers purchased to date. Overall, CCP has exhibited a proven capacity to extract revenue from its stocks of ledgers at a rate around 4.25 cents in the dollar (or face value) per year. This extraction rate is relatively stable, and the costs associated with its business are not directly proportional to its revenue. That is, higher revenue tends to be associated with higher NPAT margins. Note: Management is expecting higher extraction rates from the recently purchased ledgers, due to a perceived higher quality of credit card debt.

Attractive Fundamentals – CCP’s forecast fundamentals are relatively undemanding, with a P.E.R. ratio of only 9.8 times, an EBIT multiple of only 6.4 times and a fully franked yield of 5.0% (50% payout ratio). Compare this to its peers and in particular the recent listing of RMG at a forecast FY01 P.E.R. of 19.0 times, EBIT multiple of 11.0 times and zero dividend and CCP looks inexpensively priced – particularly given that RMG continues to trade at a premium. In fact, if CCP traded at an equivalent fundamental level, notwithstanding its smaller market capitalisation, it would potentially trade at in excess of $0.90 per share.

Liquidity of Shares – While only small in market capitalisation, 39.8% of the total issued shares will be tradable upon the ASX, ensuring a relatively liquid after market.