Credit Corp Group: Putting Fair Value Estimate Under Review as We Revisit Our Outlook

We place no-moat Credit Corp Group CCP under review following the release of a disappointing trading update, and as we assess what this means for our future valuation assumptions. The firm anticipates impairing 14% of its U.S. debt ledger assets, which is estimated to reduce fiscal 2024′s net profit after tax by AUD 45 million—close to half of its prior guidance of AUD 90 million-AUD 100 million. We had expected growth in the U.S. debt ledger business to outstrip that of its Australian counterpart, making up 70% of debt ledger EBITDA by fiscal 2028, from 32% in fiscal 2023.

This debt ledger impairment is a byproduct of higher interest rates, which have driven a deterioration in cash collections. It also suggests the U.S. market is more competitive than we expected, at least currently, and challenges the growth we projected. While we project fiscal 2024′s NPAT to fall slightly below guidance and expected margins to deteriorate until fiscal 2025—reflecting higher delinquencies—this surprise impairment calls into question the longer-term profitability of Credit Corp Group’s U.S. business.

Our concerns are twofold. First, if there are likely to be further one-off impairments beyond those announced today. Second, what is the longer-term profitability of Credit Corp Group’s U.S. business. We’ve yet to see how this business performs in an environment with rapidly rising interest rates. Our thesis was for 1) Credit Corp Group to continue gaining share in the U.S. as corporations look to diversify beyond the major two U.S. debt buyers; and 2) margins to gradually deteriorate—but remain reasonable—reflecting the need to pay more for debt ledgers given competition.

The recent fiscal 2023 update suggested larger peers continued to outbid Credit Corp Group for better-quality debt ledgers, leaving aging and riskier debt ledgers. The downside potential to earnings was evident in today’s trading update.