Company Overview: Collection House Limited is a receivables management company. The principal activities of the Company include the provision of debt collection services and receivables management throughout Australasia, and the purchase of debt. The Company's segments include Collection Services, Purchased Debt Ledgers and All other segments. The Collection Services segment includes the earning of commissions on the collection of debts for clients. The Purchased Debt Ledgers segment includes the collection of debts from client ledgers acquired by the Company and its subsidiaries. The Company's services include debt purchasing, collection services, hardship services, legal and insolvency services, and credit management training. Its subsidiaries include CLH Legal Group Pty Ltd, which offers debt recovery, and litigation and insolvency solutions and services; Collective Learning and Development Pty Ltd, a training provider, and Midstate CreditCollect Pty Ltd, a boutique collection agency.


CLH Details

Decent Set of Numbers for FY19: Collection House Limited (ASX: CLH) is primarily engaged in the provision of debt collection services and purchase of consumer debt. As on October 28, 2019, the market capitalisation of Collection House Limited stood at ~A$173.61 million. The company reported a decent set of numbers for twelve months ended June 30, 2019, wherein its revenue stood at $161.057 million and NPAT grew by 18% to $30.69 Mn. Its EBITDA, PBT and NPAT margins were decent, and the figures were 34.9%, 27.1%, and 19.1%, respectively. The performance was underpinned by the customer-centric approach, expansion of its quality PDL purchases, and ongoing commitment towards superior data analytics and leading-edge technology. During FY18, the company continued to grow its business, with the strategic acquisitions of New Zealand-based Receivables Management (NZ) Ltd (RML), and the PDL book and selected assets of ACM Group in Sydney. The company stated that FY19 was a record year for the company when it comes to PDL investments. The company continued to look at the capital structure and borrowing, so that it can reap the benefits of the opportunities ahead with respect to expected market growth in FY20 as well as potential to further increase the market share. During FY19, the company has wrapped up the second transaction under the partnership with global investment house named Balbec Capital LP.  It was further stated that the transaction provided the company with $25 million of the unencumbered cash up front, in which the company is deploying towards new, higher yielding PDL books. The deployment towards the leading technology happens to be a core strength of the business, and Collection House is getting positioned to adopt the competencies as well as capabilities from the fintech industry. The company posted a net profit after tax amounting to $30.7 million, reflecting a rise of 18% on a YoY basis, and the company has surpassed its EPS guidance, delivering the result of 22.3 cps. This has been achieved through tailwind of the improved profit recognition under new accounting standards as well as stronger second half, that contributed around 60% of full-year result.

There are expectations that respectable capabilities to build cash levels and favourable business strategies can act as tailwinds for long-term growth.
 

FY19 Financial Results (Source: Company Reports)

Top 10 Shareholders: The following image provides an overview of the top 10 shareholders in Collection House Limited:


Top 10 Shareholders (Source: Thomson Reuters)

YoY Improvement in Key Margins: The company’s net margin stood at 19.1% in FY19, which implies a rise of 0.9% on a YoY basis and, therefore, it can be said that CLH is possessing decent capabilities to convert its top-line into the bottom-line. CLH’s gross margin stood at 83.9% in FY19, which is higher as compared to FY18 figure of 82.8%. RoE stood at 14.1% in FY19, which is higher than the prior year figure of 13.2% and, thus, it can be said that the company has delivered better returns to its shareholders in FY19, and this might help the company in getting traction among the market participants. 
 

Key Metrics (Source: Thomson Reuters)

How Purchased Debt Ledger Segment Has Performed: The Australian and New Zealand debt buying businesses have performed reasonably well in FY19, and there are expectations that this performance might further improve in FY20. Additionally, the ongoing success is supported by the data analytics, and the company has placed a high level of importance on building the capabilities so that they can make sound judgements with regards to the pricing and quality of debt portfolios in which the company invests. The segment posted a revenue amounting to $93.7 million, which implies a rise of 25% on a YoY basis. This includes a $9.8 Mn pre-tax profit from PEP transaction with Balbec. The transaction liberated capital from the mature payment arrangements, reducing the requirement for the additional debt capital to finance deployments towards new PDL acquisitions to drive growth as well as improved financial returns.


PDL Segment: Results (Source: Company Reports)

Understanding CLH’s Collection Services Segment: The company’s Collection Services segment posted revenue amounting to $67.6 million that implies a fall of 2% on a YoY basis. The shortfall was because of short term external factors, i.e., delayed referrals from some clients due to the Financial Services Royal Commission and the federal election. Since this was anticipated to be the short-term trading downturn, the collection resources were maintained during FY19. It was further added that the management considers this as a reasonable result during the period of significant market disruption for clients. Since year-end, there has been a return to the normal activity, and first 2 months of FY20 have witnessed the FY18 levels of revenue and profitability.


Collection Services: Results (Source: Company Reports)

Total Assets Witnessed a Rise: The company’s total assets as at June 30, 2019, amounted to $471 million, reflecting a rise of 27% on a YoY basis. It’s net gearing at the end of the year was 48%. The company has been generating robust operational cash flow, and the significant portion of this is being reinvested towards asset base. The company has been working within its facilities as well as gearing framework and the anticipated step-up in cash collections in FY20 would be providing adequate funding to remain very active in the market for the PDL books. Also, the company retains in-principle access to $100 Mn of off-balance sheet finance through a partnership with Balbec.
Declaration of Dividends: The Board of the company has declared fully franked dividend amounting to 4.1 cents per share, and the record date was October 3, 2019, and the payment date was October 25, 2019. In conjunction with 1H dividend, which amounted to 4.1 cents per share, the total dividends for the financial year come out to 8.2 cents per share. It was further stated that DRP would be active at a discount of 5%. In FY19, the company has invested $132.6 million in PDLs and $8.5 million in Volt Bank shares, and it also distributed $8.4 million in the dividends (Net of DRP) to the shareholders. The following picture has been extracted from the company’s FY19 results presentation:


Operational Efficiency (Source: Company Reports)

What To Expect From CLH Moving Forward: The outlook for the company in FY20 happens to be positive, and the company continues to grow its market share in Australia and New Zealand with the help of acquisition of debt portfolios at a right price. For the first time, the company has provided cash collections guidance for PDL segment in the range of $145 million-155 million, including the PDL purchases in the ambit of $80 million-$100 million in FY20. The company’s partnership with Balbec puts it in a robust position in order to take advantage of the opportunities as and when they arise. The company has been anticipating a positive contribution from an alliance with Volt. It can be said that the strong client relationships, tied to data-driven as well as customer-centric approach, are positioning the company well for changes which are occurring in the industry, and for anticipated growth ahead.

The company has also provided business strategies and prospects for future financial years. The core business strategy is to grow business with the help of deployment towards existing business, expanding into the new business segments within collection services, and creating as well as building complementary business model adjacencies.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Approach


EV/Sales Multiple Approach (Source: Thomson Reuters), *NTM: Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: The company’s stock price has witnessed a fall of 9.19% on a YTD basis while, in the time frame of the past one month, the stock has fallen 4.26%. The 52-week trading range of the stock stands at $1.070 to $1.480 and currently, the stock is trading at slightly below the average of its 52-week trading range with reasonable PE multiple of 5.54x, proffering a decent opportunity for accumulation. The company’s total revenue has witnessed a CAGR growth of 6.34% in the time span of FY15- FY19, while its gross profit encountered a CAGR growth of 5.39%. Also, during the same time period, the company’s net income witnessed a CAGR growth of 8.08% between FY15- FY19. As per ASX, the company’s annual dividend yield stood at 6.64% at the current market price of A$1.230 per share. Between FY15- FY19, CLH’s cash receipts have encountered a CAGR growth of 4.25% and, thus, it can be said that the company is possessing respectable capabilities to build cash levels. Based on the foregoing, we have applied a relative valuation method, i.e., EV/Sales multiple and arrived at a target price of high single-digit growth (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of A$1.230 per share (down 0.405% 28 October 2019).

 
CLH Daily Technical Chart (Source: Thomson Reuters)

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