keygeo - I've reposted a summary I posted a while back on another thread for CLH where I explained my thoughts around the carrying amount of PDL assets on CLHs balance sheet. I also posted another item where I included a summary from my DCF valuation of CLH (on another thread) and without a new set of numbers haven't changed that view, I might update it when they report their full year. I haven't reposted that one here.
I have made some edits to my CLH estimates previously posted. I noted that in the early years (pre-2006), I had not made adjustments for certain cash flows received from revenue streams that don't relate to PDLs and the company no longer has (I had made adjustments in the later years - e.g. for collection services revenue). As noted previously the issue with dealing with imperfect information. This reduced the cumulative multiples that I was seeing and thus was a little more bearish on the portfolios for CLH. My overall personal conclusion/sentiment and target lifetime multiples remain broadly the same.
For comparison purposes I have also included the same for CCP (CLH first then CCP). On both graphs I have smoothed the multiples from the varying time periods to show a 4 year moving average. CLH's metrics appear less favourable than CCP and thus would appear to support a different valuation premium for CCP (whether CLH's share price is too low or CCP too high or both I haven't fully considered). CCP also appears to see payback on initial purchase quicker than CLH (within 12-18 months vs around/just over 2 years for CLH).
Note: I couldn't find cash collections by vintage historically to determine the applicable multiples for CCP over the same time frame as CLH.
CCP also appear to spend less money per dollar collected collecting their debts than CLH and have a lower gearing level. Both in favour of CCP and again the company valuation.
In terms of the balance sheet carrying value there appears to be a sizeable difference between CLH and CCP, which I explain in the following. The magnitude of the difference on the face of it does seem a little odd. As noted previously CLH's portfolio carrying value appeared to be 50% of the cash amount paid for PDLs over the last 10 years. This same metric for CCP (calculated at 30 June 15 for CCP) is approximately 16.5%.....That means quite a bit of the cash CCP collects will drop to the bottom line as there isn't as much still to expense to the income statement. Also if I included graphs I have of historic purchases you will note that CCP has continued to purchase debt so that isn't why it's balance sheet value is much lower proportionately than CLHs. Form your own view as to what this means.
CCP's balance sheet carrying amount is approximately 57% of cash collections (for FY15 year), whereas CLH's same ratio is at 193%... This might make sense if the multiples were much higher for CLH or there was a significantly larger annuity portfolio (i.e. payment arrangement book), but they don't appear to be (at least based on what I can cobble together from what is available and what they both state in investor presos). This appears to be the case for virtually any similar metrics that I can see. Incidentally Pioneer Credit has a better ratio (PDL carrying amount/cash receipts) than CLH, despite the fact that indicators currently point to a much higher ultimate multiple for PNC (which would support a higher ratio and in which case would make sense assuming that higher multiple is achieved).
For interests sake I took the purchases over the last 8 years for CLH and applied the average multiples that I had calculated for the various vintages and added 20% subjectively, except for over 3 years where I added 0.45 (around 3 x the 0.16 multiple seen in this time bucket over an 11 year period which brought the total multiple to around 2.2), to see if I could come to the carrying value of the assets on balance sheet. I couldn't and this came to approximately $233m on an undiscounted basis, short of the discounted $255m carrying value. I did this as of 30 June 2015 numbers, but this position hasn't really changed.
As an aside, it is worth noting that both companies carry their PDL portfolios (and other loans advanced as applicable) at amortised cost. It is worth understanding this to understand how amounts hit the income statement and how the balance sheet number is derived. This accounting method involves estimating the cash flows that will be received into the future and then discounting at a discount rate (the discount rate is determined up front and doesn't change under this accounting method). Note that because these assets are purchased credit impaired for cents in the dollar the cash flows that are estimated up front will need to be re-estimated each period (this is different to a normal performing loan, which you don't receive more in principal back than what you lend, but you can receive less if the counterparty defaults). So in theory assets/or components of the portfolio could actually increase/decrease in value at any given period end if the expected cash flows increase/decrease. This involves guesswork using past trends etc. Thus it is worth noting that the carrying amounts of these assets are highly subject to estimation uncertainty (in the same way as any discounted cash flow valuation methodology is, except in this case the discount rate isn't variable and is based on estimates at initial purchase; which are no more certain than the cash flows used to derive them in the first place) The discount rate is the internal rate of return based on purchase price and anticipated cash flows, therefore if you change the anticipated cash flows by definition you change the IRR that would apply throughout the whole life of the asset. Ultimately as previously indicated revenue must equal cash received less cash paid to buy the assets and the asset will be worth nil eventually (once collected, an agreement is reached extinguishing the debt or once it becomes statute barred) - which in the case of these sorts of companies will be upto 7-10 years and why it is important to look at long term collection trends where it is available. Apologies for the interlude, but useful to understand if trying to comprehend how the numbers may unfold and what they mean...
One metric in CLHs favour, although only marginally, is PA book/total face value: where CLH appears to be around 25% and CCP 23%.
CCPs balance sheet appears overall cleaner. CLH has around $20m of goodwill (collections services business related) and over $10m of intangibles related to computer software it has recently developed/developing (thus will start to appear in NPAT and EPS in coming periods). CLH has also incurred restructuring type charges several times over the years (appears more regularly than CCP), including recently in H1 16 and what the company calls a "once off restructuring" in the directors' report. A restructuring charge was also taken by CLH in FY08 and FY09.
Now, my personal view would be that CCPs portfolio appears to be worth more than the carrying value on balance sheet. Mr. Market would also seem to agree given that the market cap appears to be over 2 x the book value of the company (which includes the growing consumer lending business which makes up around 1/3 of lending assets). Conversely Mr. Market appears to be trading at quite a heavy discount to book value for CLH at 31 December. From what I can see the market appears to be valuing the fundamentals, although it is hard to know if CLH is now oversold. I like this sector, especially in the current economic climate, but because I can't clearly form my own view as to whether at current prices CLH is oversold or it is like catching a falling knife, I personally see no moat and choose to invest elsewhere. CCP has some comparative advantage and if theprice has a retracement to the low $9's then I would be sorely tempted. The current price appears reasonable to me personally based on current fundamentals, but I would just prefer a higher probability of success if I am to invest for the longer term.
DYOR, one person's opinions only and as many acceptable views as there are people will exist.
