Credit Corp (ASX:CCP) Faces 1 Major Challenge With The US Market Downturn

Ujjwal Maheshwari Ujjwal Maheshwari, November 3, 2023

Credit Corp, a major player in debt collection. The company tends to take on debts from financial institutions and works with buyers on longer-term plans to repay.

Credit Corp has witnessed a staggering 35% drop in its share price during 2023. It has actually been going OK for most of the year, but the decline is in direct response to the company’s announcement regarding the revision of its profit guidance for the fiscal year 2024.

 

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

 

Introduction to Credit Corp

Credit Corp, as its name implies, is a debt collector. It purchases slabs of distressed debt at discounted rates from institutions, such as banks, and makes a profit as it recoups more of the debt back in payments. 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.

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.

 

Reasons for the Decline in the last month

The primary catalyst behind October’s sudden downturn is the substantial impairment of the carrying value of CCP’s US Purchased Debt Ledger assets which will lead to a more than 50% reduction in the company’s full-year net profit for FY24. The impairment is estimated to represent 14% of the current carrying value of these assets. The development underscores a sustained deterioration in collection conditions within the US market.

 

The impact on Credit Corp

As a result of this impairment, Credit Corp has significantly revised its full-year profit guidance for FY24. 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. This represents a substantial 55% reduction at the upper end of the revised profit targets.

Additionally, earnings per share (EPS) are also anticipated to experience a notable decrease. The prior guidance, which estimated a range of $1.32 to $1.47 cents, has been reduced to 51 to 66 cents. These figures paint a sobering picture for investors.

 

A Bounce Back in 2025

Consensus estimates expect revenues to be flat in FY24. For FY25, revenues are expected to increase to $501.5m and EPS is expected to be $1.32 per share, representing somewhat of a bounce back from FY24 but still below FY23 levels.

The challenges faced by Credit Corp are indicative of the broader economic landscape. Fluctuations in interest rate cycles have played a pivotal role in this scenario. A sustained downturn in the credit cycle has resulted in a higher portion of debt becoming unrecoverable. This phenomenon highlights the inherent risk within Credit Corp’s business model.

 

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What should investors do?

The question now is: what should investors do with their CCP shares? The sudden and significant drop in share price warrants caution for potential buyers. The impairment of US PDL assets raises concerns about Credit Corp’s ability to accurately value its acquisitions, potentially leading to future overpayments.

For existing shareholders, particularly those who acquired CCP stocks at a higher valuation, the option to sell might be tempting. The substantial reduction in profit guidance for FY24 may signal a prolonged period of reduced returns. On the other hand, holding onto CCP shares may be a prudent choice for long-term investors with a higher risk tolerance. CEO Thomas Beregi’s optimism about the FY24 US investment pipeline suggests a potential for recovery. Additionally, the reduced market pricing of debt assets in the US could ultimately support the viability of continued purchasing.

 

A bit of a risky play

While the current situation is undoubtedly challenging, it’s essential to consider the potential for recovery. The reduced market pricing of debt assets in the US and management’s efforts to reassess and adapt to changing conditions offer a path to long-term stability and growth.

In light of these factors, investors should carefully weigh their options and consider their risk tolerance. For those with a high tolerance for risk, holding onto CCP shares can offer the potential for future returns. However, for risk-averse investors, alternatives should be looked at.

 

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