Pinned straw:
Sold my holdings on the day of the results. Like @lankypom, I’ve held for an extended period of time since Nov 2010. I also held it in a previous stint from Sep 2004 to Nov 2007.
Consumer Lending did a lot of heavily lifting in the result. The EBITDA return on the carry value of the three main segments - Consumer lending, ANZ PDLs, and US PDLs were 33%, 15.7% and 8.8%. Who would have thought 10 years ago that Consumer Lending would be the division that would be wildly more profitable than the core PDL businesses.
My main concern is the ballooning carry value of the PDL assets on the balance sheet.
Collections have been declining in the past 3 halves, yet the PDL carry value has been increasing. If one thinks that an asset is increasing in value, should it be yielding less? This doesn’t make a whole lot of sense, and shows that management have had a shift away from their ultra conservative accounting practices.
The ANZ PDL business is currently in run off as its not able to get the supply necessary to grow collections. The business collected $141m in 2H. Just for comparison, this is very similar to the collection level the group had in FY15 which was $288m for the full year. To highlight the shift in the company’s conservativeness, the carry values for FY15 vs Today is $164m vs $297m.
I’m harping on about PDL carry values because the amortisation of it affects every number from the revenue down. Revenue is in fact Collections minus PDL amortisation. And the shift to a less conservative stance has benefited the bottom line over the past couple of years.
In absolute terms, Credit Corp’s PDL carry value is still conservative vs its competitors. But that’s not saying much in an industry littered with blowups.
The US PDL carry value is the one I’m most concerned about. They’re carrying A$465m on the books, and collecting about $200m a year. Having seen repayment plan delinquencies creep up in Q4, collections have started to flatten after heavy investments PDL and big headcount increases. The carry value seems bloated and the Amortisation vs Carry Value ratio for the US business is at PNC’s levels of 0.21, having consistently trended down over the past few years.
I’m concerned about write downs. If not write downs, then the headwind the relaxation of the amortisation policy will have on the profits in future years.
UlladullaDave
Nice work @mushroompanda
I've long had a weird fascination with these PDP businesses. Have owned both PNC and CCP and have dodged bullets on both. When they are on song they pump cash but they also blow themselves up from time to time.
That strikes me as weird (unless I've done something wrong) that a $45m NPAT adjustment is ~$80m or so for a 14% write down which implies a book value for the US PDPs of something like $570m. Given the total PDP value in FY23 was $780m, 73% seems higher than I would have anticipated given the collections profile between the two geographies. That might explain @mushroompanda chart of rising PDPs but flat collections.
Obviously they have overpaid. The question is by how much and how it affects the US business over the next few years. It's probably worth pointing out their debt has an LVR covenant of 60% of the book value of the PDPs. Back of the envelope this would get them to around 45% so a lot would have to go wrong from here for them to breach that covenant, but in terms of access to funding another couple of write downs and the headroom could start to shrink to a point it affects PDP investment decisions. The cashflow profile of these PDPs is such that they can really be turbocharged by using debt (usually able to collect the investment within 12 months or so and can daisy chain the debt along to build a cf stream etc) Lack of funding has hampered PNC for a few years now.
Interesting times.
Watching from the sidelines.
mushroompanda
In the past I've provided feedback to management that they should provide the PDL split between the different geographies - which they took on board as a good idea, but never implemented. At the time they did provide me with the splits, and I've used it to back solve in the past few years - since collections and amortisation per geographies are disclosed and you can work it out from there.
In the recent FY23 results conference call, it was disclosed during the Q&A. A$465m was US PDLs. $45m NPAT impact is a $64m write down (assume 30% tax rate), so 14% is correct.
I don't think covenants are an issue here either. But there will be more scrutiny over the amortisation policy going forward. In my mind, there has been an unprecedented relaxation of policy for the company over the past couple of years.
Solvetheriddle
Yes well done Panda. one of the strengths of SM is the record of your past comments, held to account both good and bad. i can see my comment above as well
re CCP, historically buying it on a bloodbath has been a profitable strategy and maybe that will be shown to work again this time. the bigger picture, imo, is that I once viewed this company as a quality LT grower, hard to see that thesis as holding true, It has evolved into an ordinary company, along with countless others. so of less interest to me LT.
Solvetheriddle
@mushroompanda fair enough, maybe C19 largesse has killed off the debt book biz for a while. as i looked more at this result i was surprised by the biz mix changes, as more personal lending grows as well as the US, it deserves a lower multiple, imo. i understand what they are doing but not that thrilled by it all. too many play in personal lending.
at least they controlled their funding costs unlike SVR (MNY)
Wini
This is brilliant analysis @mushroompanda. Better than anything I've seen come out of the sell side brokers on CCP since the result.