no v shape recovery, page-14

I have included below a rough summary of what I see in terms of value and why I get to $0.85-0.9/share. The multiples I used for PDLs I think are likely aggressive based on past average actuals. The collection costs I am using appear low based on the past few periods (cash outflow for operations + PDL purchases in the last half were $85m so annualised $170m, my estimate has $3m less than this).

The trends on collections over the 0-2 yr time frames have been downward over recent periods which isn't a good thing. A reduction in the ultimate multiple from around 2, makes a significant downward revision to my valuation. Note that the cumulative multiple for lifetime to date is around 1.6 and it looks like an ultimate multiple of around 2 could be achieved (i.e. if purchasing stopped and run off the current portfolio) but is very reliant on the backbook to yield. A change in timing or ultimate multiple obviously changes the valuation. If 2.2 was to be achieved there would be upside in this valuation. Growth on the collection services is a bit of an unknown.

If I reduce corporate costs by a further $1m a year on top of what I already have that increases the valuation by around $0.02.

A decrease in the discount rate (WACC as valuing pre-finance charge free cashflow) to 11% increases the valuation to around $0.92, but bear in mind the risks. I would probably want a WACC of around 12%. Again this is quite subjective though.

You will note that I have assumed the PDL purchases will grow quite a bit also and essentially have assumed these would be funded from free cash flow and haven't added to the debt pile.

The terminal value is a hard one, but a value of around 10x 8th year free cash flow is probably quite generous.

This is sure a bit simplistic and no doubt we could all poke holes in it, but I feel I have been quite favourable and thus provided a fairly good base case scenario and there is a case for a lower valuation. If I had to provide a broad range I would probably say fair value between $0.7-$1/share. The current share price is just above the upper end of that, but I start to feel stretched at that end of my the valuation range and thus see downside risk (plus the sentiment risks if there are any write downs or negative news from the company, conversely if the broader market increases 500 points then no doubt there would be some bullish sentiment at work).

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DYOR and make your own decisions. These are just my guesses.