Australian’s heavy debt burden and a growing inability to pay it back is a bonanza for the debt collection industry. It therefore comes of no surprise to see debt collection agency Collection House in broker buy lists. Shares in Collection House are up almost 8% this year, while shares in industry peer Credit Corp have risen 18%. Credit Corp shares, now sitting at $4.22, have lost some steam since hitting $6.37 in April this year; nevertheless, the return for long-term investors has been nothing short of spectacular.
RBS Australia upgraded Collection House from a hold to a buy due to what they note as ongoing momentum. Last month Collection House reported a 48% lift in earnings to $3.5 million, with a full-year forecast at $11 million to $11.5 million, up 13% from previously thought. ‘The application of technology has contributed to record high productivity levels, particularly in the PDL business, with higher value obtained from older purchased accounts,’ management said.
Ironically, debt is one concern for investors in Collection House. It carries $76 million in debt, equating to 80% net debt to equity, which is high. RBS notes that the company intends to make a small capital issue and reduce its dividend payout to reduce debt on its balance sheet. The broker seems happy with this decision.
On the other hand, Credit Corp is not geared up; the company reported a full-year guidance of $21m-23m, which was revised upwards to $23m-25m.
There has been much discussion around Brisbane-based bank Suncorp Group lately, reflected in its wildly swinging share price. Its shares have rebounded some 23% over the last three months, after tanking to an all time low of $6.03 in August.
Deutsche, RBS, Macquarie, Citi, Credit Suisse, UBS and JP Morgan have Buys on Suncorp irrespective of weak loan growth, and a potentially worrying trend in the housing market. Suncorp has a deposit to loan ratio of 69.5%, which is sound, and non-performing loans fell over the first quarter of the financial year.
RBS has a price target of $9.80 of Suncorp as it expects a re-rating of the stock as performance normalises. Macquarie is upbeat over the bank’s improvement in bad debts and its slow divestment of non-core assets. UBS has a price target of $9, and prefers the stock over Insurance Australia Group (IAG).
With a 6% shareholding in Suncorp, there has been some speculation that NAB could be a potential buyer if times get tough – however there has been no talk of that recently.
Institutional interest in rare earths miner Lynas Corporation is increasing as Macquarie joins at least three other brokers to initiate coverage and place a Buy rating on the stock. The broker notes that Lynas is close to its first production at its WA plant in Mt Weld and that its Malaysian plant is on track.
The ongoing saga of Lynas Corporation is a good reminder of the risks faced by miners that extract resources in other countries; political/economic and community opposition is regularly an impediment to production. Lynas currently faces a backlash in both Malasia and the small African nation of Malawi, which are worrying trends for shareholders. Its shares are down 43% over the past 6 months.
Lynas was confident that its $200 million processing plant in Malasia would be operational by the end of this year; however the Malaysian Government is holding up the process until Lynas meets recommendations from the International Atomic Energy Agency. Residents in the area are opposed to the operations fearing radiation pollution, with Lynas confirming that radioactive waste from the plant would be placed in storage cells to avoid leaks.
Lynas also faces opposition to its rare earths tenements, the Kangankunde Carbonatite Complex (KGK), in Malawi. Although Lynas believed that it was the registered legal owner of the mining license, a South African party is disputing this claim in the high court.
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