Previously, I wrote on credit and financing companies, so now let's look on the other side of that by examining the debt and receivables collection business. When payments aren't made, or a company wants to improve the collection of accounts receivable income from customers, who can it turn to? Here are three companies that fill that role. Let's see how they make money by collecting it.
Specialising in debt collection and debt purchase services, Credit Corp Group (ASX: CCP) buys the purchased debt ledgers (PDL) of other companies or organisations, and then manages the collection of that debt. This $444 million company achieved $142 million in total revenue, and made $31.9 million in net profit after tax (NPAT), maintaining its net profit margin above 20%.
In addition to its domestic operations, it is expanding into the US with a staff of 41 overseeing a $5 million PDL book, and has plans to increase staff capacity to 240 there. Its return on equity is 22.8%, and earnings per share (EPS) have been growing annually by an average 32% for the past three years. Revenue has consistently grew, but the company acknowledges that there is now more competition for PDLs, so its pace of acquiring more may have to be tempered if those acquisitions cannot achieve the company's required internal rate of return.
Collection House (ASX: CLH) provides receivable management services, as well as legal and insolvency services. It had similar revenue, $136 million, yet made only $15.6 million NPAT in 2013, or roughly half of what Credit Corp Group did. Still, it was a 23.1% increase from 2012's $12.68 million.
Free cash flow has been improving over the past three years, assisting in the approximate $160 million it has made in investments over the same years. Its return on equity (ROE) is 12.7%, but long-term debt is creeping up, with total gross gearing (debt/equity) about 72%. Its net profit margin is about 11%, or half of Credit Corp Group's.
Lastly, Thorn Group (ASX: TGA) has a business segment for receivables management, although the majority of its group revenue and profit comes from consumer financing and household goods rentals. In 2013, this segment had $1.47 million NPAT on revenue of $18.8 million that itself was down $2.25 million, or 10.7%.
It may not be as big as the other two debt collectors in this field, yet as the company tries to grow this segment, it will possibly take business away from the others, or at least add enough competition to reduce profit margins. With this company you get diversification from credit and rentals, and total 2013 NPAT was $28.2 million. Its 14% profit margin and 18% ROE show it's a firm earner.
Foolish takeaway
Of these, I would say Credit Corp Group is the strongest in terms of earning power and growth. If more competition does enter the market, margins may tighten, but since it has the best margins of them all, it would still be ahead. It can possibly forestall this if it can lock in big customers and government organisations for mid- or long-term contracts, and set up a margin of safety around its business.
