Credit Corp: Valuation Cut to AUD 15.00 From AUD 22.50 on Unprecedented Rate Hikes Since Listing

We materially cut our fair value estimate on no-moat Credit Corp Group CCP to AUD 15.00 per share from AUD 22.50. We cut our margin and revenue growth assumptions, expecting a substantial decline in business profitability compared with the favorable last few years. This reflects rising bad debts given the anticipated economic downturn and increasing competition in the U.S., where Credit Corp is a small player. Historically, rapid rate rises, such as those in the U.S. in 2005-06 have preceded an economic downturn. For Credit Corp, this tends to mean greater defaults and higher impairments for debt ledgers. Debt ledgers are bundles of generally underperforming consumer debt onsold to a debt collection agency, such as Credit Corp. These are the assets the firm purchases.

The rapid interest rate increases in 2022-23, the fastest since Credit Corp’s listing in 2000, pose a greater threat to earnings than previously thought. We expected rising but manageable debt impairments, assuming the firm has consumer repayment insights to help acquire profitable debt ledgers. However, the recent and unexpected large impairment of its U.S. debt ledger book challenges our expectations of its ability to withstand a downturn and to profitably acquire U.S. debt ledgers.

We now expect poorer cash collections and higher receivables impairments over the medium term, compared with the last decade. Since operating in the U.S. market, Credit Corp has yet to experience the rapid interest rate hikes it now faces. This means the business lacks some experience of how debt ledgers are likely to perform in more adverse conditions. Larger and longer-established U.S. peers likely have a better understanding of repayment behaviors there and the value of debt purchases in rising rate environments. This likely enables them to acquire higher-quality debt ledgers, leaving riskier ones for Credit Corp.