Ann: Final Director's Interest Notice - Lev Mizikovsky, page-51

Some of the key risks the way I see it (which could also present opportunities), and some which also relate to competitors, are:

- Ensuring adequate purchases at appropriate prices to secure future earnings (replace retired debts and grow) and meet or exceed weighted average cost of capital. The following chart shows CLH pdl purchases and cash collections over time (cash collections in CLHs case, unlike CCP, require a couple of assumptions to calculate) and shows the peak in purchases a couple of years ago. Given the rate of collections is most in the first 2-3 years and slowing purchases then a lot of work has to be done to sustain earnings and meet return on capital (foray into new services may assist, as well as any material reduction in cost per collection dollar):



- Increased retail banking arrears rates and unemployment pressures can weigh significantly on the ability to collect. Conversely this can give rise to access to new block or forward flow arrangements on good prices. However, this is a double edged sword and a quick swing in these factors would have a more immediate downside impact on earnings in my personal view as the effect of cheap purchases would come through over a longer term time horizon as a sudden drop in collections would be immediate.

- Leveraging data and collection efficiency is key, if the competitors can do it and thus can effectively pay more but generate higher profits, other players in the market will be squeezed if they can't meet or beat those improvements. CCP appears to be the best at this given its economies of scale (and potentially smarts). CLH appears to be at the other end historically (cost to income circa 80%) and if the new CEO can make major inroads here could do great things for valuation. I reckon a 10% absolute drop in that ratio could be worth at least 20-30 cents to the share price. Linked is also improving collection efficiency - one issue I potentially see is % of purchase price returned (i.e. cash collected versus paid) within one and two years appears to have deteriorated slightly over the last couple of years (at least based on my analysis) and that needs to be arrested and reversed. If a declining trend continues then that doesn't look good for margins. Positively they have appeared to have ben collecting more from older debts.

- Accounting shock leading to share price reaction - one thing that personally concerns me with CLH is the relative size of the asset value on its books to the cash it collects. This is something I've talked about before. For example: from 1 July 2012 to 30 June 2016 (4 years) CLH spent around $265m acquisition cost on PDLs. As at the end of 30 June 2016 they had a total PDL asset on their balance sheet of $265m. If I do the same for CCP those numbers are $565m and $253m respectively (or $583m and $314m if I take CCP for 4 years to Dec 16 as they have already reported). In other words CLH has 100% of what it spent over the last 4 years still on its balance sheet, whereas CCP has under 50%. While this doesn't necessarily indicate CLH has done something wrong, it does show CCP could probably smooth its earnings a little easier than CLH if cash collections take a short term dive (and CLH is more exposed to an accounting shock like an impairment - which would likely knock confidence if it did occur). As another similar metric CLH carries its PDLs at roughly 74% of its payment arrangement book, whereas that same metric is only 25% for CCP (and there is no indication of higher default rates for CCP that would give real reasons for the difference). While in a different stage of its growth cycle PNC had that second ratio at around 71% at 30 June with growth and purchases weighted towards the end of H2 (that would push that ratio higher than it would otherwise be) and indications of better investment returns (based on my own return multiple analysis at least).

- Introduction of new competition, particularly large overseas players that could disrupt the status quo in purchasing dynamics, collection and data leverage smarts etc....

- There is always regulatory risks and compliance is key not just for compliance sake but reputation with banks etc. This applies to all in the industry.

- Material increases in debt funding costs (and required equity returns) will hit cash flows given all of these companies fund (to greater and lesser degrees) there acquisitions via debt. Any issues with debt servicing and flow on to covenant compliance would obviously be a company destroyer. Think CLH is in no real danger here.

Overall my personal view is that at prices in the last week or so ($1.25-1.3) CLH would look good value, subject to: succeeding to reduce the cost base per collection unit, no adverse macro shock to collection ability or funding costs and its ability to leverage its data to maintain competitive in the market place and/or improve collection efficiency and no nasty accounting surprises. If one or more of these takes hold over the longer term then the valuation starts to look problematic (except for the accounting one which if it occurred could present a buying opportunity if price dropped significantly).

As ever just my views and others will have others, DYOR.