I'm ascribing a 50c value to CCR, based on assumptions outlined below, with in my mind enough upside asymmetry to make it a buy. I purchased on market at 40c a few weeks ago.
There are a number of aspects of the business I like, including:
- Reasonably high insider ownership, founders still onboard (of both Credit Clear and ARMA).
- Its simple. Digitising debt collection seems simple and they're taking a good first mover position. No super high capital investments, no irrational billionaire disruptors/competitors, not sexy.
- Have invested ~A$30m in AI. Their use of AI sounds pretty simple and has been proven to work. To me that probably makes it a good application rather than looking for a "hail mary" application.
- They have grown by acquisition, but Q1 FY23 showed strong leading indicators of growth in new clients, increased digital payments. I'll look to see the end user number and revenue follow in next quarters. If revenue doesn't grow over next 2 quarters I need to reassess.
- Growing into a large market and potential for international expansion given the relative simplicity of the tech and global nature of the industry
- Unfortunately, there's likely to be growing demand for their services as the music stops around the world on cheap credit.
- Cashflow positive, cash in the bank (although growing earn-out obligation to ARMA founders)
Things that concern me and I am watching:
- Relatively slow revenue growth (compared to my expectations) in Q1-23. I expect better for next few quarters as discussed above.
- Risk around personal security and hacking and lack of trust in digital communications. Doesn't mean there's necessarily great trust in "old school" methods, but it might slow some of their onboarding or force some redesign of their communications and algorithm.
- The whole ARMA acquisition (almost a merger) is relatively new. On the outside looks like a logical and harmonious merger, especially with Smith taking over as CEO. But always something to watch to ensure the happy family stays happy. The incentives are a bit awkward with Smith now running the business and his earn-out still growing for the next few months.
- It's not dirt cheap so there's downside risk. Current market cap ~150m, yet unprofitable and in a non-sexy industry. Potential for the market to dump it if growth is slow to materialize.
Valuation:
I've run a few DCFs at NPV10 and am comfortable with the risk reward at 40c currently.
50c valuation is based on the following:
High revenue growth occurs thanks to successful execution of the digitization model at a time when the macro is in their favour with world facing rising cost of debt. ~A$100m revenue by 2026 and A$200m revenue by 2032. Continues to grow at 5% after that. Important to note 40% of my value is picked up after 2032. I'd argue this is no different to saying you expect a PE of 20 in 5 years time - implying you think you can sell it to someone else who will see long life profits at that point in time.
Gross margins transition from 50% (non-digital) upto 70% by 2027. Management have stated digital collection has 85% gross margins, I'm not going all the way there.
The fixed cost base increases gradually to about A$70m in 2032.
