Debt Collectors don't have the best reputation, but Collection House Limited (ASX: CLH) and Credit Corp Group Limited (ASX: CCP) have their place.
Collection House is the smaller of the two companies with a market capitalisation of $188 million. Credit Corp is the biggest listed debt collector in Australia with a market capitalisation of $801 million.
Debt collection is an interesting business, the debt collecting company has to buy the debt which is paid back over a period of years. If the debt collector slows down on purchasing debt, this affects immediate and medium term profits.
Which debt collector is the better buy out of the two?
Results
Collection House slowed down its purchases and consequently reported net profit after tax (NPAT) for FY16 was 17% lower than the previous year. This has caused the share price to fall 43% in 10 months.
However, Credit Corp did keep purchasing debt ledgers during FY16 and it was able to report a 20% growth in NPAT.
Diversified earnings
The main portion of earnings for Collection House and Credit Corp is purchasing Australian debt ledgers. However both businesses have recently diversified their earnings.
Collection House won a contract for collection services for the Australian Tax Office. Credit Corp started up the 'Wallet Wizard' small loan provider which is growing its 'lending' business segment.
Credit Corp also has a business section in the USA which it can expand further if desired.
Dividend
Collection House has a much higher grossed up dividend yield at 8.2% due to its share price decline. A high yield is only useful if the dividend is maintained or increased.
Credit Corp has a respectable grossed up dividend yield of 4.17% which is forecast to grow by 13% in FY17.
Outlook
Both Collection House and Credit Corp are expected to have a good FY17. Collection House is expected to get back on track and increase its earnings per share by 19.2% this year. Credit Corp is forecast to continue its good run and grow earnings per share by 16% during this financial year.
Time to buy?
Both businesses are trading at reasonable valuations for their expected levels of growth. Credit Corp is trading at 15.2x FY17's estimated earnings whereas Collection House is trading at 10.5x FY17's estimated earnings.
In this case, I think both look like good buys. Collection House would be the better buy for investors looking for income and Credit Corp would be the better buy for investors looking for capital growth.
