Pioneer Credit (ASX:PNC): purchasing debts

August 31, 2018

 

One of three listed credit collection agencies, Pioneer is the newest and, until recently, the smallest (it has recently surpassed stalwart Collection House (ASX:CLH) by market cap). It has brought a clean reporting standard and claims of a higher quality debt purchasing benchmark. The proof will turn out over time (or not) as we see the longer-term collection success rates, but so far, so good.

 

We caught up this week with CEO Keith John and we like the fact he has plenty of skin in the game. His stake is around 12.5%. We also like the fact his staff are incentivised over the long term. They receive their benefits if hurdles are surpassed through years three to five. This makes it difficult to cheat the system to expediate returns … a practice the industry has been guilty of plenty of times in the past ... because the time period is lengthy and matches up better with debt collection periods.

 

The company grew its Net Profit 64% to $17.6m on revenues that were 45% higher. It liquidated more than $100m of its Purchased Debt Portfolio (PDP) for the first time, 44% more than the previous year (PDP = debt it purchases off banks and other creditors at a bit below 20 cents in the dollar, which it then claws back from the debtors who owe the money). The dividend lifted 51%. Pretty healthy reading all ‘round, reflected in a historic PER of 12x.

 

Keith reckons the company will purchase at least as much debt as it did last year ($84m) and with the layering effect over time of its debt accumulations that is likely to lead to further revenue growth. 71% of those purchases have been locked in already, the biggest percentage at this stage of the year in the group’s history. He wants to ensure the company achieves a high level of collection certainty before he materially lifts the amount of debt being purchased. When that time comes the company has more than adequate funds available under its gearing covenants.

 

The company is branching out into personal lending (who isn’t) and has dipped its toe in the water with an early book of $6m. We don’t think there is much differentiation to the product but the company does have the advantage of marketing to those it has successfully collected debt from (with the benefit of credit history that comes with that) and a strong culture of discipline that give it a better chance than some of succeeding.

 

It has also taken an investment in a FinTech called InDebted ($0.5m) and will pilot the system over the next twelve months before committing to it. InDebted is a machine-learning platform that has the potential to increase the efficiency of PNC’s debt collection efforts via algorithms that streamline the process and eliminate time wastage. We’ll see.

 

Management has forecast 14% net earnings growth in FY19 which appears conservative to us (in keeping with how Keith likes it). It’s pretty cheap and if it does no more than produce a consistent collection effort it will produce good growth and provide a solid yield. Anything more will be a bonus.

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