Buying a good idea at $1.19, page-5

Personally I believe the share price is indicating both sentiment and underlying fundamentals. There is some recent positive news regarding the debt service contract with the ATO but as far as the debt purchase part of the business goes I personally think there are some concerning indicators in the longer term trends.

For example: I took all available data for PDL purchases and that part of the business that I could obtain from past financial statements going back to 2001 and also used graphics to determine the cash flows derived from purchases to construct how the PDLs yield over time (all of this information has either come from financial statements or investor presentations on the company's website or from Etrade news archives).

Now I have had to make certain assumptions to derive cash flows that relate to PDLs (vs other revenue streams), and thus can't claim this information is 100% accurate (so please don't rely on this being gospel and treat it as skeptical and circumspect). There have also been changes in accounting treatments (both as Australia adopted IFRS in 2005 and a change in accounting policy in circa 2009), 3 different auditors (over the last 5 years or so) etc. However, the below is estimates of the return on purchases over 1 year, 1-2 years, 2-3 years and from 3+ years.  Also shown is the cumulative yield earned to date on all PDLs. A number of 1 indicates a 100% return of purchase price, only then does the collection activity start to contribute to running costs of the company (including collection efforts) and also profit. As noted in a prior post, direct collection costs over the last few periods appear to be circa 40-45 cents in the dollar and thus this would indicate a yield of 1.4 to 1.5 is required before other costs and profit can be met. Let's assume then 1.5 x is required from cash collections before a +ve contribution can even be considered to be earned.



What this shows is that the cumulative multiple has appeared to have peaked and started reducing over recent periods. This suggests either that collections are getting harder, the company has been paying more for those debts and thus harder to earn yield (recent statements have indicated they are pulling back as they consider the purchase prices not sustainable), a combination of both or some other factors. The longer term cumulative multiple trend is obviously not complete as there are still future cash flows to collect on the current book, however because this cumulative multiple includes all years over the last 15 years this won't increase it significantly if all purchase activity was to stop. Remember purchasing activities are being wound back over the last year or so.

The current expensing rate of the company implies a multiple of circa 2.2 times and has done for some time. What I can't reconcile is that the longer term trend indicates 1.8-1.9 x (let's be generous and say 2 x), but the expensing rate implies circa 2.2 x. This indicates a risk that an increased expensing rate or write down could occur if cash collections don't pick up. Note the average yield I calculated once the debt is greater than 2 years old is circa 0.55-0.6x (i.e. what expect still to receive on original purchase price), and actually lower than this if I use just the past 5 years of data. As a sub-set of this greater than 2 years yield, greater than 3 years appears to yield (I used purchases for T-3 to T-7 on the basis debts are generally statute barred after 7 years) around 0.15 to 0.2 x, although there are less data points to support this.

Again, while my calculations and data may be off this is what personally is keeping me away from this company in the sector and it is just one persons opinion.

DYOR, this involves a lot of guesswork and probably wrong.