Credit Corp (ASX:CCP): Will FY25 be a better year?

Credit Corp (ASX:CCP) was one of the first stocks to release its FY24 results, having done so last week. Its profit came in substantially lower due to an impairment of its US assets. Even though this was not a cash outflow, it has indicated that business was not so rosy for the company and investor fears may have been true. Hence, shares are more than a third below their pre-pandemic peak. But with the damage of the impairment done and dusted, and interest rates set to go down, will FY25 be better?

Who is Credit Corp?

Credit Corp is a major player in debt collection. The company takes on debts from financial institutions that have lost the patience to recover them, and works with the debtors on longer-term plans to repay. It somehow manages to make a profit from recovering the debt. Be this as it may, the company bears a risk because the debt is generally unsecured – so there is not a recourse for lenders if the debt cannot be paid.

It also has a smaller division that collects debts on behalf of entities for a commission and a personal finance arm that lends money to people with bad credit histories.

A long term journey downward for shareholders

Credit Corp has witnessed a staggering 35% drop in its share price during the last 5 years. It has not been a case of constant terminal decline, but there have been shocks along the way. During the Corona Crash, Credit Corp plunged by over 70% as investors feared that it would not be able to collect debts due to people’s distressed financial situations. Shares have recovered, but never reached their pre-Crash highs.

Credit Corp (ASX:CCP) share price chart, log scale (Source: TradingView)

Credit Corp’s first couple of annual earnings results post-pandemic illustrated solid growth. In FY21, it generated an $88.1m profit, up 11%, followed up with a $96.2m profit in FY22. But FY23’s profit came in 5% lower at $91.3m, and FY24 will be lower still. The company told investors last October that it had to impair the carrying value of its US assets and predicted it would reduce its FY24 profit by over 50%. Initial estimates of a statutory net profit after tax (NPAT) range between $90 million and $100 million have now been adjusted to a range of $35 million to $45 million.

Ultimately, the impact was not as bad as expected at $50.7m, but still 44% lower. Its underlying profit was $81.2m, 11% lower. But on the flip side, its consumer loan book grew by 24% to reach $445m, and a solid final quarter was reported in the US. Credit Corp will pay a dividend of 23c per share, representing a payout of 51% and a yield of 1.5%.

Will FY25 be a better year?

Only time will tell, but the company thinks so. It has issued guidance of a $90-100m NPAT, $200-250m PDL (distressed debt) acquisitions and $45-55m lending volumes.

Analysts covering the company, which amount to no less than 8, expect so too. Their mean target price is $19.73, nearly 30% higher than the $15.20 closing share price on August 8, 2024. Consensus estimates call for $560.7m in revenue, up 17%, and a $95.3m profit, up over 80% on a statutory basis and 17% on an underlying basis. These estimates place the company at just 10.7x P/E and 1.9 PEG for FY25.

It remains to be seen what impact interest rate reductions will have on the company. There are cases to be made either way as to what the impact of lower interest rates might be. On one hand, it might mean less distressed debt to acquire, because consumers will find it easier to repay their debt. The other, it may encourage credit holders to take out credit in the first place. Either way, the business is in an operationally better position than it was a year ago.

But the company and analysts covering it expect FY25 to be better, and there are few other companies with such high profit growth, at such a reasonable P/E multiple that can be found right now. Keep Credit Corp on your watchlist!

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