Forum Archive Index - August 2000

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

ACHIEVABILITY OF FORECASTS

We consider the revenue forecast outlined above, as being well within the scope of CCP's management capabilities. Supporting this view is that:

• CCP has secured two new ledgers with a total face value of approximately $53 million, which have not been activated at the time of writing. The two debt ledgers (Citibank and Westpac) have been acquired following the usual due diligence processes and risk assessment carried out by CCP.
  
  Following the successful tender for a debt ledger from Citibank in 1998 (CT1998), CCP has recently obtained a second ledger, also from Citibank (CT2000). The CT2000 ledger has a similar profile to the previous CT1998 ledger; i.e. it is primarily consumer credit card debts. The achievable rate of collections therefore is assumed be similar to the previous ledger. The second acquisition was a ledger from Westpac. The Westpac contract is significant, as it is the first sale of a significant debt ledger by a major domestic bank (ANZ have sold a small debt ledger (+$19 million) to Portfolio Management Group and NAB is rumoured to have ‘tested-the-waters’, also with a small debt ledger). The Westpac debt ledger is anticipated to be of a higher quality than the two Citibank ledgers, based on the assessment of the ledger during the due diligence process. As such, the conversion rate on that ledger is expected to also be higher than the other ledgers.
• Significant economies of scale in data retrieval, collation, 'skip chasing' and internal administration are expected to be achieved, as existing and additional staff are deployed on a larger base of debt ledgers. This is expected to result in a higher net collection rate per collector.
• Major changes to the incentive structure for collectors have been made, with remuneration having been altered to a performance basis. Again, this is expected to drive the collection rate higher.
• We expect management focus to sharpen, as over the past two years the Company has focused resources on the tender and due diligence processes for the ledgers it sought to acquire and more recently on the IPO. With these now essentially complete, CCP management believes it has adequate ledgers to drive significant earnings growth, and it will now be relatively free to focus on extracting greater value from these ledgers.

FORECAST SENSITIVITY ANALYSIS



Note: Each cell represents the P.E.R. (based on 2001 prospective NPAT) of CCP, given a revenue extraction rate (in cents per dollar of face value) and an NPAT / Revenue rate.

In order to assess the sensitivity of revenue forecasts to key assumptions, the above matrix was established. The median (centre box) in the table, shows that given CCP’s historical median extraction rate and its historical median NPAT / Revenue Ratio, the Company would be listing at a P.E.R. of 16.6 times, which is still below the 19.0 times, at which RMG listed.

Moreover, the table ignores the synergistic benefits attributable to having increased staff and a far larger ‘collection universe’ of debt ledgers (i.e. now $126.0 million versus an average of only $51.5 million over the past three years to 30 June 2000.

Study of the Sensitivity Analysis within the Prospectus reveals, as expected, that FY01 NPAT is most sensitive to the level of collections, with a 10% increase, multiplying forecast NPAT by 25.1% to $1,764,000 and a 10% fall in the level of collections reducing forecast NPAT by 25.0% to $1,058,000. The other major sensitivity represents all expenses, with a 10% increase in these, reducing NPAT by 18.5% to $1,149,000 and a commensurate 10% fall in expenses, multiplying the forecast NPAT by 16.9% to $1,648,000.

We remain comfortable with management’s forecasting of all expenses and consider the major variable being the extraction rate achieved in driving revenue from the two recently purchased ledgers. Given success with this, the Company should earn a re-rating to levels more in line with its peers.


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