The recent decision out of the Reserve Bank of Australia (RBA) to hold the line on interest rates came as no surprise amidst growing concerns about the alarming rise in household debt in Australia.
RBA Governor Philip Lowe cautioned against lower rates encouraging already indebted Aussies to pile on more debt, especially in the face of troubling statistics from the labour market.
Although the January employment numbers showed a modest increase in the total employment rate year over year, full-time employment saw a loss of 56,100 jobs, marking the lowest point in 16 months. The latest release from the ABS (Australian Bureau of Statistics) showed a much-improved picture, but there is still debate among economists on interpreting the “real” employment picture.
On the one hand, you have those who advocate raising interest rates to slow down the increase in household debt. On the other hand, you have those cautioning rate increases would inevitably curtail consumer spending, which contributes approximately 60% to our economy.
While the employment outlook and the impact of interest rates on consumer spending may be debatable, the debt levels are not.
Going into 2016 household debt to GDP in Australia stood at about 120%. The following chart compares how we managed to continue to rack up debt while consumers in other countries were cutting back.
Today Aussie Household Debt to GDP is approaching 190%. The RBA says not to worry, claiming much of that debt is in the hands of high income households capable of managing their debt load, per a recent article in the Australian Financial Review.
Consulting firm Digital Finance Analytics disagrees. The most recent results from their mortgage stress modeling survey research shows roughly 670,000 of 3.1 million Aussie households cannot manage living and interest rate costs. Here are some of the most relevant observations made by the firm:
• ‘The rise (in stress) can be traced to continued static incomes, rising costs of living, and more underemployment; whilst mortgage interest rates have risen thanks to out-of-cycle adjustments by the banks and bigger mortgages thanks to rising home prices.’
• ‘It’s the more affluent household groups, with big mortgages and lifestyle, now finding mortgage rates are rising when wages aren’t that are more exposed. They’re used to being profligate and they may not have as much in the bank as you’d expect.
• ‘Not every affluent household is in difficulty, but it’s enough to make it interesting.’
A September 2016 article in the Sydney Morning Herald reported findings from the Bank for International Settlements showing Australian Household Debt to GDP of 123% ranked at the top of the heap of the 44 countries in the bank’s survey.
Today there are apologists claiming “not to worry” but no matter from which angle you view the data, we have a troubling amount of debt here in Australia.
Long time share market investors know that bad news for some can be good news for others. It is a sad truth that the outlook for ASX Debt Collection stocks may be about to improve.
There are three major Debt Collection stocks on the ASX. The following table Includes some performance history as well as earnings and dividends forecasts.
Except for current dividend yield, Credit Corp Group Limited (CCP) is the clear leader of the pack. Pioneer Credit Limited (PNC) is a relative newcomer to the ASX, listing in May of 2014 with a first trading day closing price of $1.60, rising 23% to the current price of $2.05.
The ASX is up roughly 17% year over year. All three of these companies have outperformed. All three pay fully franked dividends and Credit Corp and Collection House Limited (CLH) are expected to grow their dividends. We have no analyst estimates for Pioneer Credit.
Credit Corp Group operates in three business segments:
• Debt Purchase
• Debt Collection
• Consumer Lending
The company buys delinquent portfolios of accounts receivables from credit providers at significantly lower prices than the face value of the debt. Settling with delinquent borrowers for more than the company paid for the debt but for less than the borrower owes can be a “win-win” for both parties. Repayments over time provide recurring revenue for the company and ease the burden for the borrowers.
Credit Corp also acts as debt collector for companies unwilling to sell their receivables or to incur the costs of debt collection on their own.
Finally, Credit Corp offers consumer lending to credit-challenged consumers.
The company has been in business for more than 25 years, billing itself as a “provider of sustainable financial services to the credit impaired consumer segment”, not simply a debt collector.
While some take a dim view of companies like Credit Corp, it is a fact many consumers are excluded from traditional financial sources. For these consumers, Credit Corp offers multiple financing opportunities –
• Wallet Wizard for online loans from $500 to $5000;
• CarStart Finance – for car loans up to $20,000;
• ClearCash – offering consumer credit lines up to $3,000
• Credit 2U; offering the services of a finance broker to look for the best deal based on your borrowing power; and
• Trove Capital – online business loans.
The company reported solid Half Year 2017 Financial Results on 31 January, reporting double digit increases in both revenue and profit along with double digit forecasts for the full year, yet the stock price dropped. Here is the chart.
Investors expected big things when Credit Corp entered the US market. Fierce competition and an increasingly hostile regulatory environment have plagued the company’s operation there with the Half Year Results yet again showing losses in the US segment, although reduced over prior reporting periods. The company has an analyst consensus rating of OUTPERFORM.
Collection House has struggled over the past two years, with the share price declining close to 40%. Here is the chart.
With one notable exception Collection House serves the business sector in a variety of ways. The exception is the consumer focused ThinkMe Finance – a brokerage service for consumer loans – the company’s first entry into the consumer market.
For business clients Collection House offers everything from debt collection services, to debt purchases, to credit management training for company credit staff to legal insolvency services.
Despite the myriad of services Collection House offers, debt purchases – known as PDL’s or Purchase Debt Ledgers – are typically the core business of any debt collection company. Businesses group their bad debts and sell them to the debt collectors as PDL’s. Somewhere around the third quarter of 2015 Collection House announced it would be reducing its PDL acquisitions due to rising costs. In sharp contrast, Credit Corp Group announced around the same time it would be increasing purchases.
By February of 2016 the CEO left the company for personal reasons, with an experienced and well-respected replacement coming in May. Given the recurring nature of PDL revenues, it may be some time before revenues pick up at Collection House. However, for income investors, the company’s dividend performance may be a reason to buy, along with a Price to Earnings Ratio (P/E) of 10.05.
Collection House’s ten-year dividend growth rate is 16.3%, almost double that of Credit Corp Group’s 9%. The analyst consensus rating, however, is UNDERPERFORM.
Pioneer Credit Limited (PNC) has a business model with a narrower focus – debt purchases and collection services for major banks and financial institutions. In late 2016 the company entered the consumer market with a variety of offerings under the banner Pioneer Credit Connect. This operating segment provides financial assessment coupled with consumer loan products from multiple sources addressing multiple needs, including loan refinancing. The company offers access to credit scores free of charge along with education on how to interpret and manage a credit score as well as assistance in managing debt and financial management.
From FY 2014 to FY 2016 Pioneer’s revenues increased 137% while net profit went up an astounding 804%. Management guidance calls for another increase in profit – an 11.7% rise for FY 2017.
Pioneer is small and relatively new to the ASX but its track record deserves attention. However, market participants apparently are not rushing in to buy the stock. The average daily trading volume over three months for PNC is a paltry 81k shares, compared to 312k for Collection House and 224k for Credit Corp Group.