Debt collection business Collection House Limited (ASX: CLH) today reported a half-year net profit of $11.2 million on $68.3 million of revenue for the six-month period ending December 31, 2014. Profit and revenue are up 19.1% and 22.7% respectively on the prior corresponding period (pcp).
A fully franked interim dividend of 4.4 cents per share was declared, which is a 12.8% increase on the pcp.
Knocking on the door
The company ticked all the boxes in the reporting period in executing a growth strategy based upon growing purchased debt ledger collections, while managing costs and improving risk management. For the period purchased debt ledger (PDL) collections were up 25.2% to $64.4 million, while collection services revenue was up 8% on the prior half.
Notably the business places a lot of emphasis on staff training and retention, which reflects the challenges of efficient revenue generation for a debt-collection business.
It has also been investing in systems and analytics to improve the quality of its purchased debt ledgers, with an annualised cash recovery yield more than 40% higher than in the corresponding period two years ago.
The business has been borrowing to fund its accelerated expansion plans, but so far that strategy appears to be paying off. Net debt stands at $40.4 million, with annualised finance debt at 1.4x financial year 2015's first half earnings.
The business said as it grows market share it expects to generate operating cash flow which will consistently exceed PDL investment requirements, and thus reduce gearing over time. Balance sheet and regulatory risks remains, but overall Collection House's position in a growth industry looks to outweigh them in terms of the investment proposition.
Collection House's main listed rival Credit Corp Group Limited (ASX: CCP) has been another strong performer over the past year.
Outlook
The company confirmed it is on track to achieve full year earnings guidance of $21-$22 million and appears to have the building blocks in place to steadily grow earnings in the years ahead.
The kicker is the valuation given that Collection House only trades on an estimated forward price earnings of 12.5 given that it could be estimated to generate earnings per share of around 17.5 cents in the full financial year. This estimation based on the first half's earnings per share of 8.6 cents.
Throw in the fact that the stock could be expected to yield at least a fully franked 4.1% this financial year and the $2.20 price tag makes this business look a buy in my opinion.
