Description
Collection House Ltd (ASX: CLH) is a small cap. Australian company offering pure play exposure to the collection services sector with +50% upside. CLH collects debt it has bought through its Purchased Debt Ledger (PDL) segment (60% of revenue) and on behalf of third parties through its Collections Services segment (40% of revenue).
Australian Tax Office Collection Contract
In November 2015 CLH announced that it has been awarded a contract to collect debts for the Australian Tax Office (ATO). CLH’s contract runs from April 2016 until April 2018 with the ability to extend for two one year periods. CLH replaces Baycorp as one of the four approved collection agencies.
The contract pays a flat fee for collection which is not contingent upon recovery. Initially, all four collections agencies will receive an equal allocation of debt to collect. Future allocations are based on a number of factors including cost and effectiveness.
|
Historical
Allocations
|
Nat. Credit
|
Probe
|
Recoveries
|
D&B
|
Baycorp
|
|
2014-15
|
0
|
32.4%
|
22.3%
|
25.6%
|
19.7%
|
|
2013-14
|
0
|
34.4%
|
22.2%
|
24.8%
|
18.7%
|
|
2012-13
|
0
|
22.0%
|
28.1%
|
32.2%
|
17.7%
|
|
2011-12
|
3.6%
|
0
|
36.7%
|
33.3%
|
26.4%
|
|
2010-11
|
25.1%
|
0
|
25.3%
|
24.6%
|
25.0%
|
ATO Contract and Revenue Opportunity
External credit collection agencies are paid a flat fee for each debt that is referred to them by the ATO irrespective of the outcome achieved. Each agency negotiates its fees independently; however, after the initial allocation of debts, the ATO allocates additional collections based on a range of factors including cost. Each agency receives feedback on its performance which has created competition between the agencies.
The auditor of the tax office noted that the cost per account was $36 in 2011 and $33 in 2012. Current estimates are that fees are in the range of $27 per account. While the ATO has not confirmed this figure they have said that the costs of using external collection agencies are generally on par or slightly below the tax offices’ internal cost.
PDL Guidance and Growth
CLH provided bearish guidance around competition for defaulted loans at their October 2015 annual general meeting. Management also noted that higher unemployment and lower consumer confidence were likely to slow PDL collections. This meant that defaulted loan purchases could be 20% below FY2015 purchases ($72.3m). CLH will almost certainly beat management guidance in FY2016.
In November 2015, CLH’s major competitor Credit Corp Group (ASX:CCP) raised guidance for earnings and loan purchases. On 10-December-2015, CLH announced that it had purchased $61m of defaulted loans in 1H16 (~85% of FY2015). I expect CLH’s PDL investments to be in line with their original guidance (August 2015) of 90-110% of FY15.
Forecast PDL Cash Flow and Revenue
PDL revenues and cash flows have been forecast using historical development factors. Purchased PDL’s are forecast to decline 2.5% in FY2016 and then grow at 4% which is the medium term growth rate for defaulted debt in Australia.
| |
2009
|
10
|
11
|
12
|
13
|
14
|
15
|
16
|
17
|
18
|
19
|
20
|
Principal
|
PDL Rev.
|
|
2009
|
7
|
|
|
|
|
|
|
|
|
|
|
|
37
|
70
|
|
2010
|
13
|
6
|
|
|
|
|
|
|
|
|
|
|
36
|
40
|
|
2011
|
5
|
9
|
10
|
|
|
|
|
|
|
|
|
|
36
|
45
|
|
2012
|
4
|
6
|
14
|
12
|
|
|
|
|
|
|
|
|
44
|
51
|
|
2013
|
2
|
3
|
9
|
19
|
10
|
|
|
|
|
|
|
|
48
|
58
|
|
2014
|
1
|
2
|
6
|
11
|
16
|
17
|
|
|
|
|
|
|
56
|
63
|
|
2015
|
1
|
1
|
4
|
7
|
10
|
21
|
14
|
|
|
|
|
|
61
|
78
|
|
2016
|
1
|
1
|
2
|
4
|
7
|
15
|
21
|
14
|
|
|
|
|
66
|
83
|
|
2017
|
1
|
0
|
1
|
3
|
4
|
11
|
12
|
20
|
15
|
|
|
|
68
|
84
|
|
2018
|
|
1
|
1
|
2
|
2
|
7
|
10
|
13
|
21
|
16
|
|
|
72
|
90
|
|
2019
|
|
|
1
|
1
|
1
|
4
|
6
|
9
|
13
|
23
|
16
|
|
75
|
94
|
|
2020
|
|
|
|
2
|
1
|
3
|
4
|
6
|
10
|
14
|
24
|
17
|
79
|
98
|
Encore Capital and Baycorp
Encore Capital has purchased a majority stake in Baycorp which is the third largest collection agency operating in Australia. This may create a significant change in the competitive landscape; however, Baycorp is currently half the size of CLH and was been loss making until FY2015.
Encore paid $18.3m for 27.86% of Baycorp which equates to a price of 11.3x EV/EBITDA based on 1H16 EBITDA run rate.
While Baycorp’s relationship with Encore is a long term positive for the firm (and a negative for CLH) Baycorp’s loss its ATO debt recovery contract is evidence that CLH can and will continue to compete.
Financials
|
AUD MM's
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
|
Revenue
|
97.3
|
107.4
|
126.0
|
137.6
|
146.9
|
155.4
|
|
YoY Growth
|
9.1%
|
10.3%
|
17.4%
|
9.2%
|
6.7%
|
5.8%
|
|
EBITDA
|
32.3
|
35.4
|
39.3
|
51.5
|
58.0
|
61.4
|
|
YoY Growth
|
20.5%
|
9.6%
|
11.2%
|
31.0%
|
12.6%
|
5.9%
|
|
EBIT
|
30.3
|
33.9
|
36.9
|
48.7
|
54.8
|
57.8
|
|
YoY Growth
|
23.7%
|
11.7%
|
8.8%
|
32.1%
|
12.5%
|
5.5%
|
| |
|
|
|
|
|
|
|
EPS
|
$0.15
|
$0.16
|
$0.17
|
$0.22
|
$0.25
|
$0.25
|
|
P/E
|
11.80
|
13.24
|
13.39
|
10.05
|
6.15
|
5.92
|
|
EV/EBITDA
|
9.17
|
10.49
|
10.40
|
6.42
|
5.93
|
5.77
|
|
EV/EBIT
|
9.76
|
10.95
|
11.09
|
6.80
|
6.28
|
6.12
|
Valuation
CLH has historically traded with a EV/EBITDA multiple of 6.5x to 10.5x. At the current depressed price of AUD$1.51 there is very limited downside and the potential for +50% upside.
|
EV/EBITDA
|
6.5 x
|
7.5 x
|
8.5 x
|
9.5 x
|
10.5 x
|
|
2016
|
$1.68
|
$2.06
|
$2.45
|
$2.84
|
$3.22
|
|
2017
|
$1.96
|
$2.39
|
$2.82
|
$3.25
|
$3.68
|
|
2018
|
$2.10
|
$2.54
|
$2.99
|
$3.44
|
$3.89
|
| |
|
|
|
|
|
|
EV/EBIT
|
7.5 x
|
8.5 x
|
9.5 x
|
10.5 x
|
11.5 x
|
|
2016
|
$1.06
|
$1.43
|
$1.80
|
$2.16
|
$2.53
|
|
2017
|
$1.39
|
$1.79
|
$2.20
|
$2.60
|
$3.01
|
|
2018
|
$1.53
|
$1.95
|
$2.38
|
$2.80
|
$3.22
|
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
=>Full year earnings and FY2017 guidance
=>the outcomes of tenders made by CLH in FY2015 should be made public soon