Credit Corp Group Limited (ASX: CCP) reported its results for the first half of FY2018 on Tuesday, highlighting 14% revenue growth, an 18% increase in profit for the period and remaining on course for full-year earnings growth of between 12-16%.
Good numbers for a company currently trading on a trailing price to earnings (P/E) ratio of 17, so why has the share price fallen almost 10% since the announcement?
Perhaps the biggest concern of the market is the company's 30% reduction in purchasing through its core Australia and New Zealand debt buying business. Although profit from this segment still rose 5% for the half and collections 4%, a continued decline in purchases would be detrimental to earnings.
CEO Mr. Thomas Beregi stated that the Australian and New Zealand market remains competitive, and that Credit Corp's pricing discipline has meant reduced purchasing. Purchasing conditions are expected to remain challenging, with several competitors flagging increased investment.
Credit Corp's Australian debt ledger purchasing segment generated 67% of group revenue for the first half ending 31 December 2017, and 81% of group EBITDA. Little wonder then, that investors are worried about declining purchasing opportunities.
The results announcement wasn't all concerning for Credit Corp however, as the company's consumer lending and United States debt ledger purchasing segments both enjoyed strong increases in revenue and earnings.
Credit Corp's Wallet Wizard brand of loans for credit-impaired consumers has been a driver of lending growth, as the lowest-cost loan in the segment. Consumer lending revenue was up 27% when compared with the previous corresponding period, while earnings grew an impressive 81%.
The US debt purchasing business produced its first half-year profit and market conditions are expected to remain favourable. Opportunities to purchase higher volumes of debt means Credit Corp will require additional collection capacity, and the company is in the process of obtaining new and expanded premises in Salt Lake City, Utah, as well as planning to secure a second US site within the next 12 months.
Revenue from the US debt purchasing segment rose 79%, while earnings improved 250% to $0.6 million, up from a $0.4 million loss incurred during the first-half of FY2017. Combined with consumer lending, the two newer business segments are expected to generate 33% of revenue and 28% of total profit for FY2018.
Foolish takeaway
While Credit Corp appears relatively cheap considering its impressive half-year results, I would like to see improved debt purchasing conditions in Australia and New Zealand and a longer history of earnings in the United States before I considered investing.
