Credit Corp Group Limited posts strong profit growth: Is it time to start knocking on Collection House Limited's door?

There's big profits to be made in the growing market of specialised debt collection. But which is the best company for investors to buy?

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Debt collection agency Credit Corp Group Limited (ASX: CCP) posted a 16% rise in underlying net profit after tax to $34.8 million on revenues of $174 million for financial-year 2014.

The group makes its money by collecting unpaid debts on consumer credit cards, phone bills and personal loans. It buys the debt at a large discount from the original debtee and turns a profit through its specialised debt collection methods. The group said its core operating metric, collection efficiency, remained unchanged on the prior year, with debt purchasing discipline crucial in effecting a good return.

Shares fell around 5% over the past year as the group's two new ventures into money lending and U.S. debt purchasing markets did not go as well as some expected. It has found the U.S. debt collection market far tougher going than Australia, blaming its struggles on the higher price of debt there, while the consumer money lending business has yet to turn a profit.

As a result of the inauspicious start in these new markets the group trades on just 12 times earnings of 75.4 cents per share in FY 2014, with a fully franked yield of 4.4%. The debt collector is forecasting earnings per share around the 80 cents mark for FY 2015 and a dividend payout between 39-42 cents, effectively flat on this year's 40 cents payout.

Credit Corp expects its core domestic debt buying business to produce further profit growth in 2015, with an expectation that its consumer money lending business will turn a profit for the first time also.  At $9.08 shares could be an opportunity given the strength of its core domestic business.

The strong result for Credit Corp's domestic debt collection business also means investors may start knocking on the door of smaller rival Collection House Limited (ASX: CLH), which is due to report full-year results on August 21, 2014. Collection House currently sells for $2 on equally attractive multiples to Credit Corp, without the distraction of a move into an operationally complex U.S. market.

Motley Fool contributor Tom Richardson owns shares in Collection House. You can find him in Twitter @tommyr345

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