Pinned straw:
High Level Comparative Analysis
The primary player in the Australian market for Purchased Debt Ledger / Purchased Debt Portfolio (same thing, hereon in called PDL) acquisition is Credit Corp. (ASX: Credit Corp). Where Pioneer Credit is a pure play debt purchaser, Credit Corp purchase debt, they’re mercantile agents (they act as an agent for the original creditor, clipping the ticket), and they are a consumer lender.
Comparing 2022 balance sheets, where Pioneer’s source of revenue is PDL only, Credit Corp have a range of incomes and therefore diversified cost bases, which makes comparison tricky.
There are some useful points of comparison however:
Revenue Comparison
The purpose of this analysis was to benchmark the proportions of interest and principal repayment to assess equivalence in ratios of interest and principal recovery. This doesn’t tell us too much but it gives us an idea of relative size and serves as a sense check. It’s also interesting analysis to see how much of the revenue is interest.
1. CCP Are recovering 5.5x of PNC in total, of which
2. Almost equal rate of Amortization
3. Almost equal proportion of their total earnings (comprising interest and principal repayment) is Interest.
Performance Measure 1: Revenue $ per employee $
When looking at operational efficiency one can look at the qty (in dollars) of revenue that can be earned with a dollar of employee cost. This talks to ability to contain salary costs, deliver efficient operations and so forth.
The table above shows the total revenue and employee expenses. I’ve adjusted the CCP employee expenses to use a ratio that discounts based on the proportion of the overall revenue which is attributable to the PDL business (the rest of the revenue comes from consumer lending and other services). This analysis shows:
1. Generally speaking, CCP is able to generate $1.84 dollars more per dollar of employee expense than PNC
2. If equal employee performance, PNC should be collecting $167,870,560.00.
The PNC annual report does talk to investment in newer software and so forth so it will be interesting to see whether this number improves in 2023’s report. By all rights, bridging just half of this gap would have just about made them profitable. For now, however it’s significantly less efficient than CCP.
Performance Measure 2: Proportion of PDL income to total Performing arrangements
This measure compares the two companies’ ability to penetrate and refresh their performing arrangements (the total proportion of their book of debt + Interest, that is currently being repaid). The higher the percentage, the greater their ability to do this, but it comes at the cost of a greater the requirement to buy new PDL (so much of earnings comes from first year debt), and get non paying customers to convert to paying customers.
This table shows that Credit Corp’s PDL revenue comprised a total of 38% of their entire book of performing arrangements. For Pioneer Credit it was only 23%. It seems that Credit Corp are more effective at sourcing and processing a greater proportion of current term debt repayments and getting their customers to pay.
Valuation
In coming to learn about these two companies, I realise that they’re not in my wheelhouse, and whilst it’s been an interesting exercise for a novice like me to learn about these companies and perform this basic analysis, I’m not sure either of them has significant opportunity for growth.
Pioneer Credit is hamstrung by the lack of desire to diversify into other kinds of debt. KJ wears the PDL only moniker in his presentations as if it was a badge of virtue, but he wears this at the expense of having a similar business that will protect them to some degree, to the peaks and troughs that come with availability of PDL’s from major financial institutions.
And on to PDL’s, Pioneer’s growth is limited to the availability of these in market. The only way to achieve significant long term growth is to broaden addressable market and penetrating outside of Australia, much like Credit Corp are doing. This may be on the horizon for Pioneer, and in the meantime they have a lot of work to do to make themselves more efficient at collecting the debt available to them.
In terms of borrowings, Pioneer Credit have $256m of borrowings whereas Credit Corp have just $128m. Whilst Keith mentioned in the presentation that they enjoy industry leading levels of leverage comparatively speaking, when compared to Credit Corp, the only real major benchmark in this region, they appear to be heavily leveraged. Furthermore they appear to be paying a significant premium for that this year (in the order of 40m Pioneer, vs 5m Credit Corp in 2022).
Keith mentioned that the Price to book value of the company was less than 1 (or words to that effect) in the Strawman session. This is roughly correct with net assets being at $41m and market cap being at $44m. But I don’t find this a helpful metric when trying to assess comparative value.
For equivalence, I calculate that pioneer credit should be delivering 15m of NPAT. The Q3 update in May provided EBIT of $23m YTD which is a significant increase. They state that they are on track to profitability for FY23. So presuming that they just about get to profitability, they're still $15m short. When looking at efficiencies and debt it’s clear that there’s a significant scope to right-size the business over time with the right investments into operational optimisation and reducing the debt burden, but those things will take time. If executed however, this company could currently be undervalued.
With relative inexperience in valuation, I’ve looked at equalising or standardising the ratio of share price / NPAT to build equivalence and it appears that PNC requires approximately an NPAT of $2.6m to justify its current share price.
Key learnings:
- It pays to be the CEO of a debt recovery firm. Both CEO’s earn base of circa $700k. Given the relative performance differences and failed bets, it’s remarkable that Keith John demands a salary that’s $78k more than Thomas Beregi. Also, Keith’s salary is exclusive of Super whereas Thomas’ is not. OK this is a fatuous comment, I know.
- If the share price is still at 32c and their NPAT for 2023 is above $2.6m, then there might be a value play, particularly if they are able to reduce their operational costs and finance costs.
- If it was able to achieve that $15m for NPAT equivalence, a share would be worth roughly $2. Quite the growth opportunity if the market realised it, but this is a long way off and a path fraught with a range of headwinds for highs of 6x to 7x growth. I don’t think it’s worth it.
mushroompanda
A good set of analysis @Trancer. Metrics for debt collectors is a topic I secretly enjoy geeking out over.
However Pioneer’s collection metrics are probably not as bad as what is painted here.
For the employee expenses measure, I think with Credit Corp you’ve included the PDL collections of both the Australia and US business but excluded the costs of the US PDL business. So the difference is probably not such a gulf between the two. This metric is sometimes referred to as “cost to collect”* by collection industry players, which is an inversion of “revenue per employee cost”. Credit Corp has generally disclosed this in the presentations - 36% in FY22 for the Australian business*
I’m also going to come into bat for PNC on the Performing arrangements measure. CCP’s ANZ book is mature and in run-off mode. That is, they’re not buying enough PDLs to maintain the current book. While PNC had a record purchasing year in FY22, so the book is relatively immature. One would expect the immature book to have a lower payment arrangement % since staff have not had as much time to work it.
I generally agree with everything else that was mentioned. The debt load and the related interest payments is the biggest worry. Also the large purchases in FY22 is unlikely to be sustainable and have flattered some of the 1H FY23 metrics.
To understand the quality of the book and the aggressiveness of accounting, I also like to track the following metrics over time:
- Collections / Amortisation. “Implicit multiple for PDL amortisation”. It’s essentially how much is collected for each dollar that is written off the book. If it’s marching higher, or generally more elevated than the peers - the company might not be amortising enough of the book (overvaluing the book) to make profitability look better than it is.
- Collections / PDL carry value (average over period). “PDL financial asset turnover”. If it’s marching lower (or permanently low vs peers) and there’s no good explanation, then again the book may be over-valued and thus profit is or has been inflated.
- Amortisation / PDL carry value (average over period). Again it’s another check on whether the company is amortising enough. This one puts a bit more focus on the whole book rather than just recent collections and new book performance.
In recent times, PNC have been bringing these metrics more in line with CCP. Some of them are now comparable to the CCP US PDL business. Historically both PNC and Collection House (RIP) have had much worse metrics, which has resulted in write-downs, pain and suffering.
* Credit Corp FY22 Cost to Collect
Here's PNC's from the latest half. Though it might be flattered from the record (but I believe unsustainable) purchasing in FY22.
Trancer
@mushroompanda Just looking into this in more detail so I can figure out what I did:
In terms of cost to collect, that $150m number comes from their consolidated income '22. To get to the $105m number I did a quick and dirty separation of the proportion of that cost based on revenue data available (crude I know):
So: $105,853,476.70 = $289,996/($289,996+93,737+$30+$27,437)*$150,095,000.00
I didn't like doing it because the US business is likely to be less efficient. It's also unclear as to the synergies provided by shared services across the group which could be an advantage. Although crude, i was trying to control for employee expenses only as a means of assessing the benefit of process and automation efficacy.
Thanks for highlight their cost to collect percentage. Just working it backwards, Total PDL collection income is $535m. 36% of that is $192m. I know that the scope for the percentage is ANZ only, however if we assume they're less efficient, then then using a uniform 36% is in their favour. This number is more than their total employee costs of $150m. Suggesting that the number also includes other costs?
A question on PDL carry value (average over period). Is that the $637,321m number?
I've added in the ratios with the assumption that I've understood carry value:
PortfolioPlus
Brilliant analysis Trancer. I was once a fan of PNC, mainly because I liked the ethics of Keith John.
But as I have experienced and your analysis proves, ethics don’t count for much in a grubby business where in many instances a pit Bull and a baseball bat are more effective than a Kumbaya love in email and phone call.
The mistake I made was assuming PNC could be as efficient as CCP and thus deserve a similar PE. It didn’t happen then and I certainly don’t think it can happen today.
For starters, the interest rate they are forced to pay because of their precarious financial position is MASSIVE. I was/am (unfortunately) a six figure participant in their corporate bond where the present rate is 3mBBSW + 8.75%.
Thats impressive one might think, but not when the market value of A $50000 face value bond has slumped to $36,000.Interest rate and risk are directly related. The higher the risk, the higher the interest rate. Simple.
Yes, Keith John is a smooth survivor, but he is no Thomas Berejhi from CCP - yet his salary and other perks would suggest so. Isn’t it strange to be over compensated to deliver a sub optimal result? I do. Lesson learnt.