The earning season started this week. One of our top 5 holdings, Credit Corp Group (CCP), released their results on Tuesday. The share price surged by 9.1% on the day. So, what did CCP report and why did the market appreciate the result?
What did CCP report?
The underlying net profit after tax (NPAT) was $79.6m. The reported NPAT was $15.5m, down by 78%. The difference between two NPATs is COVID-19 adjustment. This adjustment, which includes purchased debt ledger (PDL) impairments and increased customer loan loss provision, is based on the potential impacts of COVID-19 in the future. Note that the impairment is not yet realised and therefore is a non-cash loss. CCP expects the loss will be realised in the next two years.
The COVID-19 adjustment is crucial in this earnings result. It is the first impairment for CCP in the last decade. The adjustment comprises of two parts, PDL impairment and consumer loan loss provision. PDL impairment represents an average of 18% reduction in future cash collections from existing PDL assets for the next two years (assuming a higher than 10% unemployment rate). This reflects a reduction in the ability to agree new repayment plans with clients. We believe this impairment is conservative because CCP is one of the indirect beneficiaries of the government stimulus package. The cash collections in May and June have returned to pre-COVID-19 levels due to the support of one-off repayments. The Australia government has already extended the JobKeeper scheme and it is widely expected that the government will continue to assist in the economic recovery. Consumer loan loss provision increased from 19% to 24% due to the current environment. CCP has tightened its lending approval criteria. The lending volumes in April was 19% of pre-COVID-19 levels and was slowly recovered to 38% of pre-COVID-19 levels in June. Given CCP’s precautionary steps, we think CCP is conservative in the COVID adjustment.
What is the outlook?
CCP issued a solid FY21 earnings guidance despite the uncertainty ahead. The closing price on Monday was $16.89. It implies a PE of 17 and a 3% dividend yield. In the current market, it is relatively cheap. Moreover, CCP is financially strong with little solvency risk. The company raised capital in April and it has net cash of $26m and banking facilities of $375m. Given the strong balance sheet, conservative impairment and solid guidance, the market reacted positively and the share price surged.