How debt collection challenger Pioneer Credit (ASX:PNC) is staking its claim

Pioneer Credit

We spoke to Pioneer Credit founder and CEO Keith John about his company’s unique offering in the debt collection space, including how ‘user friendly’ it is for the debtors, which is an important reason this company is able to keep buying new debt ledgers. We also asked Keith why he has been a strong recent buyer of his stock.

See transcription below.

 

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Transcription

 

Stuart: Hello, and welcome to Stocks Down Under. My name is Stuart Roberts, and I’m one of the co-founders of our service. And joining me from Perth on Tuesday the 4th of April, 2023, is Mr. Keith John, who’s the founder and CEO of Pioneer Credit, ASX: PNC. Keith, good afternoon.

Keith: Hi, Stuart. Thanks for hosting me.

Stuart: Yes. Keith, I first heard your story in Melbourne at a conference you were presenting down there and I came away pretty excited. You are the only serious competitor out there to the mighty Credit Corp in terms of buying buster debts from the banks and then collecting on those debts and then gradually building a decent business out of buying low and selling high. Is that a good summary of what you do?

Keith: Look, certainly we do compete with Credit Corp and we are their most serious competitor. Look, it’s a summary. We’d hope that they’re not all busted accounts and certainly, the very bulk of our business are people that are suffering some form of hardship as opposed to terminal decline, but that’s a nice way to tie it all together.

Stuart: Right. What’s great about you is the relationship you then form with your new debtors where you work in a collaborative fashion with them, work out a payment plan, those folks then are able to in many cases pay off their debts in full or according to the payment plan you’ve worked out. There’s a minimum of antagonism between both parties. And this is the amazing thing, you check how they think about you over time, and you’re gradually getting a high net promoter score from people who owe you money. The major banks never get that, but little Pioneer Credit over in Perth gets a favorable rating from the people who owe it money.

Keith: Yeah, it’s true. It’s a unique way of approaching this business, but certainly what we do is we buy impaired credit principally off the banks. We’ve got really high standards, so we think about that as our origination. So, how do we originate, what do we pay is really important. We don’t buy payday loans, for example. There’s none of that in our business. We are looking for consumers that can get ahead and might have suffered a life event, Stuart. So typically, what we see in the economy is the banks are out there lending money, they do a really good job of it, and they do a really good job of lending you the right amount for you. These events cause short-term shocks to your cash flow, and that’s very much with the people we end up with.

So, over the course of our journey, we’ve invested about A$700 million into these portfolios from the banks across some 400,000 consumers. We currently have a portfolio of about 250,000 consumers that owe us about A$2 billion. And of that A$2 billion, about a quarter of it, about A$500 million are on payment arrangements. So these are customers that are paying us back weekly, fortnightly, or monthly in a manner that suits them. And then we’ve got a heap of other customers we work with. But if we look after those customers well, then we’ll get a great net promoter score. And that’s why the banks choose to deal with us because they know we do a great job of looking after people going through these life shocks, these life events.

Stuart: Right. Now, interestingly, you’ve then created a net present value based on that, roughly half a billion or so that you can collect. It’s a little over $300 million. That’s roughly similar to the amount that you’ve borrowed to sustain that book. And you’re capped at only $40 million or thereabouts. So if you are anywhere as good at collecting money as you’ve been over the course of that journey, there’s a few hundred million dollars in upside set to come to the shareholders of Pioneer Credit.

Keith: Yeah. And that 500 odd is, you know, hopefully, we can do much better than that because the size of the opportunity at a static level as it is today is about $2 billion. But certainly, you know, we expect to do very, very well. We’ve done very well for a long period of time. Our market cap doesn’t reflect in my view the true value of this business and how well we’ve operationalized it. And you know, we’re working very hard to realize that value for the shareholders over the next few periods.

Stuart: So, coming into these next few periods, it’s fair to say that business is good for you. We’re probably gonna see more of these life events that you’re talking about in a slightly declining economic environment, more debt ledgers that are therefore gonna be offered to you by the banks. So there’s a chance to actually grow that $2 billion to something more than $2 billion as you recycle the collected capital that you’ve got.

Keith: Yeah, absolutely. So look, very true, macroeconomic environment’s really good for us in the sense that, you know, there’s inflationary pressures, there’s a bit of nervousness in the economy, and so forth, and that means there are more defaults rolling through. But on the other side, and this is really unusual, you know, we’re going into this environment of rising inflation, rising interest rates, well, we’re in it now. Some talk of a recession, whether we get there or not, let’s see. But uniquely, we’ve got full employment and our customers need to be employed to pay us, which is what they are.

So that’s really good for us in our business, and almost none of our customers have exposure to the housing market. So they haven’t been directly impacted by the cost of their mortgages going up. They’re impacted by the cost of living, which is much less prevalent, obviously, than the cost of a mortgage rise, and of course, by these life events that beset everyone. They’re great people, they’re good people, they want to get ahead, they’re just like you and I. When they go home at night they think, “How can I get ahead? How can I pay my bills? If I’ve got a mortgage, how do I pay it quicker?”

No one’s thinking about, “How do I get out of it?” They’re thinking about, “How do I get ahead sooner?” And they’re great people to work with, they just need someone that understands them and can give them the relief, the time, or the support they need to get back on track. And that’s what we are really good at.

Stuart: Right. So you built a great culture within Pioneer, which genuinely cares for the folks that you’re working with. And operationally, it’s fair to say that you haven’t missed a beat. The accounting standards dealt you a bit of a blow four years ago, and that’s part of the reason why this stock is so undervalued. Summarize this if you can, what happened in 2019, and how you fought your way back from there.

Keith: Yeah, for sure. Look, we’d always used Tier 1 auditors, we had PWC as our auditors. We took advice from them with respect to how we value our assets, and they summarily changed their mind in 2019. And that started us on a bit of a precipitous journey that resulted in a terminated scheme of arrangement in 2020. Pioneer terminated it, it wasn’t in the best interest of shareholders once COVID’s hit. And we’ve been working our way through that. So at a corporate level, we’ve had some challenges. We’re now paying a lot more for our corporate debt than we had historically.

We’ve got the opportunity to bring that down materially later on this year, and we’re working on that now and expect that to be very good for shareholders. But operationally, we haven’t missed a beat. And that’s been incredibly important and is a great testament to the people that run that part of our business that they’ve been supporting customers and continuing to grow our performance. And certainly, over the course of the last 12 months in particular, we’ve seen that come to the fore. We’ve invested an incredible amount of money into new portfolios, well over $150 million in the last 12 or so months, and we’re seeing great returns from that now into our business.

So our cash collections, which is our gross performance, the amount of money that people pay us is up some 40% for the first half on the prior corresponding period. EBITDA was up, you know, many multiples of what it was before as was EBIT. And they’re very good results for us, and certainly point to a very good future which we’re very excited about.

Stuart: Yeah. Now, Keith, you’ve got about 18% fully diluted of this company. You’ve participated in the last couple of capital raisings and just recently you’ve been buying on market. So there’s a lot of skin in the game from you aligning yourself to a turnaround. I’m very impressed as well with your leadership team, there’s no short-term incentives, it’s all long-term incentives over the period of time that would take to collect from some of these ledgers that you’ve bought.

Keith: Yeah. Stuart, in our business, we buy these ledgers and generally speaking, we get our money back in sort of 18 to 24 months, and we get the majority of the value of those ledgers over the course of 4 to 6 years. So it seems ludicrous to me and to my team that you would get a short-term incentive based on performance, because performance happens over a decent period. So in our business, if you’re a leader in this business or an executive, there are no short-term incentives. You get rights and those rights are spaced over four to six years. So if you do a really good job, then in a few years’ time, that’ll be worth a lot of money. And if we do, you know, a poor job, then clearly you won’t make any money.

So, you know, everyone in this business is completely aligned to shareholders, and I think that’s a critical thing in small financials. You have to have deep alignment to shareholders because we’re co-investing money together, it’s just that you are trusting me to do it for you. And that’s a great privilege and a great responsibility, and I think you need to have solid alignment, and that’s certainly what we’ve worked hard on here and what we have.

Stuart: Right. Well, Keith, well done on how you’ve come back from the events of 2019. Well done on the most recent result, not a bad effort where you’ve got you’re cash collections are up 40%. And good luck in terms of completing that refinancing before 2023 is out.

Keith: We appreciate it. Thanks, Stuart. I appreciate your wishes and your interest.

Stuart: Thanks for joining us at Stocks Down Under.