Most of the media attention given to Australian equities is understandably focused on S&P/ASX 200 stocks, and blue chips in particular. However, once you move beyond the banks, big miners and national retailers, there are some real gems to be found at the smaller end of the market. These don't have to be high risk, ultra-speculative gambles either. With a little research it is possible to find smaller firms with sound business models and long growth runways. Collection House Limited (ASX: CLH) is one such company that many investors will not have heard of.
What does the company do?
Collection House is an Australian-based debt collection and receivables management company founded in 1992. It is headquartered in Brisbane, and employs more than 800 staff in offices throughout Australia, New Zealand and the Philippines. The company's full range of services includes:
- Purchased debt ledgers (PDLs) – buying delinquent debt at a discount which it then recovers to generate a profit
- Collection services – assisting businesses with recovery of delinquent debts on a commission basis
- Receivables management – complete outsourcing service for clients
- Legal & insolvency – provision of legal advice on recovery and insolvency related matters
- Credit management training – provides development and training to personnel in the collection industry
With a market capitalisation of $300 million and annual revenue of $107 million (FY14) it is the second biggest company in the local recoveries industry, behind Credit Corp Group Limited (ASX: CCP).
How has it performed?
The management team at Collection House has established an excellent track record when it comes to generating revenue, profit and dividend growth. Revenue has grown at an average rate of 10% per year over the past four years. Over the same period net profit has doubled. The needs of income investors have not been forgotten either – since 2011 dividends have increased by almost 30%.
The company's share price has benefited from this stellar operational performance. Shares in Collection House have outperformed the S&P/ASX 200 over the past 12 months by 21%. Over a five-year timeframe the margin is more heavily in Collection House's favour, beating the index by 155%. This reflects the market's view of both the past performance and future growth prospects of the business.
Current value?
Collection House currently trades on an attractive price-to-earnings (P/E) ratio of 15 with a fully-franked dividend approaching 4%. At current valuations it trades at a slight discount to Credit Corp Group, but with a significantly higher dividend yield. Furthermore, the company's growth prospects for the future remain strong. In recent months it was announced that Collection House has launched a new partnership trust, backed by Balbec Capital LP, which will enable it to participate in larger PDL opportunities and further boost revenues.
Foolish takeaway
In recent years, Collection House has been able to grow profit at a double-digit rate despite an environment of low interest rates and economic conditions that see the big banks reporting bad debts at or near record lows. In the event of an economic downturn, the rate of bade debts will increase, providing a significant tailwind to businesses in the recovery industry. Collection House is well placed to take advantage of such conditions. In the meantime, investors can enjoy a fully-franked dividend yield of just under 4%, which is both generous for a company with such growth prospects and likely to increase in the coming years.
