buying CLH at $1.635, page-122

I think this will be an interesting company to watch as the cash collection activities associated with lower PDL purchases over the past few periods start to wash through the results in coming periods - personally I don't think we've seen the real impacts yet of not having underlying purchase growth supporting portfolio results and a change in status quo will be interesting (over seven years up until H2 15 there is really only one half year with significantly reduced purchase volumes than the proceeding half: H2 13).

What will come out in the wash over time? It will be interesting to see whether the back book can continue to support this valuation and continue to yield....Not saying it won't but will be interesting to see, as when there are changes in growth profiles sometimes issues come to light that were previously being masked by growth.

The PDL portfolio is valued at around 2x annual cash receipts which appears to be a more aggressive valuation than competitors (closer to 1.4-1.5x). Although it is worth noting that there appears to be a slightly different portfolio make-up to those others (e.g, average debt size...). However, CLH is still looking to yield over the longer time frames (as indicated through the positive aspects asserted in presentations of collecting from customers over the longer time frames) so the return period appears to be the same.  

Maybe a different underlying profile but something I am struggling to reconcile with competitor values and makes me wonder about the carrying value of the assets, especially when considering that these cash flows need to support collection efforts, finance costs, corporate costs, tax then profit..... so in that vain I thought it useful to have a look at what might be left over after all of these are paid....

The cash flows from PDLs must support purchase price of debt, collection costs, finance costs, corporate costs, tax then profit. I have calculated that every $1 of cash received requires collection costs (direct collection costs and employee benefits) and finance costs of between $0.4-0.46 per $1 [again from 7 years of results]. I calculated this by simply assigning the total costs in the income statement on the basis of proportion of revenue coming from PDLs (compared to commission revenue). Rough and ready I acknowledge but not completely unreasonable nonetheless... This also doesn't include depreciation, lease rental, other costs, tax... If the multiple from these debts is just over 2 x (some past presentations have suggested in the region of 2.1-2.3 x unless I am mistaken) this would suggest a purchase price of half of each dollar collected, so for every dollar collected let's say that 45 cents goes towards acquiring the debt in the first place (2.22 multiple). This would leave say 10 cents in the dollar to cover corporate overheads, return on capital, tax etc....With a gearing ratio of circa 40% wouldn't appear to leave much of a return on capital. Consequently, I am not seeing the value in the PDL side of the business for CLH and potentially some issues/headwinds coming that we haven't yet seen. That said with an allocation of cash collected of 45% to reducing the asset value, perhaps the book value has been conservatively managed, I just don't like the overall multiple as it doesn't seem to leave enough margin of safety to meet other costs. The main reason I personally prefer (and maybe entirely wrong) competitors to CLH in the PDL space and would rather park my scarce resources elsewhere.

Perhaps the restructuring seen in H21 16 investor preso/announcement late last year may assist the cost base and operational efficiencies?

The commission side of the business appears to be profitable and fairly stable up until H1 16 where there has been notable growth in the revenue base, which is a positive, and now there is a new Government contract/services division which is expected to impact from "Q4", which one may expect to be value accretive....

Personally I see better alternative.

Thoughts?

DYOR, just some perspectives on what I see, feel free to completely disagree