Analysing the turnaround of Credit Corp

1. BBY Limited
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b
This report may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all 19 August 2009.
Before making an investment or trading decision, the recipient must consider market developments subsequent to the date of this document, and whether the advice is
appropriate in light of his or her financial circumstances or seek further advice on its appropriateness or should form his/her own independent view given the person’s
investment objectives, financial situation and particular needs regarding any securities or Financial Products mentioned herein. Although every attempt has been made to
verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically
excluded by BBY, its associates, officers, directors, employees and agents. A full international disclaimer is contained on the final page of this report.
Credit Corp Group Limited
Giving credit where it’s due: corporate turnaround re-rating
CCP A$1.65
BUY
24 August 2009 S&P/ASX 200 18 August 2009 XJO George Gabriel, CFA
+61 2 9226 0091
ggg@bby.com.au
Credit Corp Group Limited’s (CCP) FY09 result confirms
the momentum of its corporate turnaround. We upgrade
our price target to A$2.29 (vs A$1.79) and maintain our
BUY.
We see two drivers of alpha:
Price/book re-rating − CCP’s 1.0x FY10F price/book
implies zero value for its business franchise, which is
not justified given its corporate turnaround. CCP has
completed most of the steps we previously identified in
BBY Note “Corporate Turnaround Road Map”,
13 August 2008. Our price target implies 1.25x FY10F
price/book.
EPS growth − Despite lower purchased debt ledger
(PDL) acquisitions and reduced gearing (net debt/PDL
acquisitions), CCP has still increased EPS through
staff productivity and harvesting older ledgers.
We expect these trends to continue.
CCP is now well positioned for future PDL acquisitions.
Whilst it has reduced gearing and improved efficiency, the
macro outlook has (serendipitously) improved.
BBY analysis suggests that if unemployment peaks below
6.7%, then the risk of over-paying for PDLs is greatly
diminished (refer BBY Note, “Strong operational
momentum despite challenging headwinds”).
Forecast Changes
FY10F EPS increased from 29.0 cps to 29.9 cps.
FY11F PDL purchases reduced from A$70M to A$60M.
FY11F EPS reduced from 39.1 to 38.2 cps.
DDM valuation increased from A$1.71 to A$2.15.
Price target increased from A$1.79 to A$2.29.
Company Data
Number of shares 44.3M
Market capitalisation $73.1M
12 month high/low $1.86 / $0.39
Average monthly turnover $1.3M
All Ordinaries Index 4411
% All Ordinaries n/a
GICS Industry Group Commercial & Professional Services
Earnings Summary
Year End June FY08 FY09 FY10 FY11 FY12
Net Revenue (A$M) 149.9 155.8 159.0 168.7 178.1
Costs (A$M) (139.5) (144.9) (145.8) (151.8) (158.8)
NPAT (A$M) 10.4 10.9 13.2 17.0 19.3
EPS (A¢) 12.3 24.6 29.9 38.4 43.7
EPS Growth (%) -73% 100% 22% 28% 14%
PER (X) 13.4x 6.7x 5.5x 4.3x 3.8x
Dividend (A¢) 4.0 4.0 6.0 11.5 21.8
Yield (%) 2.4% 2.4% 3.6% 7.0% 13.2%
EBIT multiple (x) 3.4x 2.8x 2.8x 2.5x 2.2x
EBITDA multiple (x) 0.9x 0.7x 0.7x 0.7x 0.7x
NTA per share (A$) $1.52 $1.79 $2.05 $2.31 $2.53
Price/NTA (X) 1.09x 0.92x 0.81x 0.71x 0.65x
CCP versus Index_name
0.40
0.80
1.20
1.60
2.00
Aug 08 Oct 08 Dec 08 Feb 09 Apr 09 Jun 09 Aug 09
$A/share
60
110
160
210
260
%
CCP (LHS) CCP Rel to S&P/ASX 200 (RHS)

2. b
BBY Limited 24 August 2009 2
CREDIT CORP GROUP LIMITED
Financial Summary
Credit Corporation Limited 1.65$
Income Statement (A$'000) 2008A 2009F 2010F 2011F 2012F Cash Flow (A$000) 2008A 2009F 2010F 2011F 2012F
Total Revenue 149,867 155,800 158,998 168,735 178,123 Revenue 149,867 155,800 158,998 168,735 178,123
Employee Expenses (40,985) (35,009) (36,571) (38,605) (40,165) Less cash Costs (70,414) (68,450) (68,501) (70,538) (74,422)
Occupancy Costs (8,392) (7,635) (7,807) (8,283) (8,787) Other Non-Cash Adjustments 2,037 (5,264) (5,719) (8,505) (8,962)
Ledger Amortisation (59,634) (70,181) (70,364) (73,216) (75,946) Gross op. cash flow 81,490 82,086 84,778 89,693 94,739
Depreciation (2,282) (1,482) (1,212) (842) (674) Portfolio Purchases (79,673) (36,740) (60,000) (80,000) (100,000)
Collection Costs (11,442) (12,617) (14,246) (15,119) (15,960) Other Investments (1,975) (277) (477) (506) (534)
Other Costs (5,893) (2,462) (2,869) (3,043) (3,229) Investment Cash Flow (81,648) (37,017) (60,477) (80,506) (100,534)
EBIT 21,239 26,414 25,928 29,627 33,362 Debt Changes 2299 (46000) 3675 (841) 12082
Interest (12,040) (10,727) (7,008) (5,487) (6,281) Share issue Proceeds 2070 447 0 0 0
Profit Before Tax 9,199 15,687 18,920 24,139 27,081 Dividends (6421) (1690) (2649) (10138) (11374)
Tax (3,838) (4,825) (5,676) (7,242) (8,124) Financing cash Flows (2,052) (47,243) 1,027 (10,980) 708
Net Profit After Tax 5,361 10,862 13,244 16,897 18,957 Net cash Flows (2,210) (2,174) 25,327 (1,794) (5,087)
Significant Items 5,000 0 0 0 0
Adjusted Net Profit After Tax 10,361 10,862 13,244 16,897 18,957 Amortisation (A$000) 2008A 2009F 2010F 2011F 2012F
Weighted avge shares on issue (M) 44 44 44 44 44 Ledger WDV balance 203,103 170,165 160,956 167,740 191,794
EPS (cps) 12.3 24.6 29.9 38.2 42.8 P&L Charge (59,634) (70,181) (70,364) (73,216) (75,946)
EPS growth on pcp -73% 100% 22% 28% 12% Amort Avge. Of WDV 29% 41% 44% 44% 40%
Dividends (cps) 4 4 6 23 26
Franking 100 100 100 100 100 Debt Analysis (A$'000) 2008A 2009F 2010F 2011F 2012F
Cash dividend 2.4% 3.6% 13.9% 15.6% Ledger WDV 203,103 170,165 160,956 167,740 191,794
Operating Spreads 2008A 2009F 2010F 2011F 2012F Est. Debt Balance 120,000 81,830 85,505 84,664 96,746
Total Cost/$ Revenue 96% 93% 92% 90% 89% Debt/ Ledger WDV (%) 59% 48% 53% 50% 50%
Cash Cost/$ Revenue 52% 47% 47% 46% 46%
Net Profit Margin 3.6% 7.0% 8.3% 10.0% 10.6% Op cash flow/interest (x) 6.8x 7.7x 12.1x 16.3x 15.1x
Pre-Tax ROTA 4.2% 8.8% 9.7% 12.1% 12.4%
ROE 8.1% 13.8% 14.6% 17.4% 18.1% Valuation Ratios (x) 2008A 2009F 2010F 2011F 2012F
P/E Multiple 13.43x 6.70x 5.51x 4.32x 3.85x
Balance Sheet (A$'000) 2008A 2009F 2010F 2011F 2012F Price/operating cash flow 0.88x 0.89x 0.86x 0.81x 0.77x
Cash 2,441 651 25,978 24,185 19,097 Price to Book Value 1.09x 0.92x 0.81x 0.75x 0.70x
Trade Receivables 6,662 1,452 1,504 1,588 1,698 Price to NTA 1.09x 0.92x 0.81x 0.75x 0.70x
Other Current Assets 123 416 416 416 416 EBITDA Multiple 0.87x 0.74x 0.75x 0.70x 0.66x
Current Ledger Assets 61,935 63,265 60,000 80,000 100,000 EBIT Multiple 3.39x 2.76x 2.82x 2.46x 2.19x
Total Current Assets 71,161 65,784 87,898 106,188 121,211
Trade Receivables 0 0 0 0 0 Valuation (A$ / Share) 2009F 2010F 2011F 2012F
Ledgers at Cost 370,477 407,961 422,185 468,785 474,485 Current share price $1.65
Less Prov. For Amortisation (167,374) (237,796) (261,229) (301,045) (282,691)
Less Current Portion (61,935) (63,265) (60,000) (80,000) (100,000) 1. DDM Valuation
Net Non-Current Ledger WDV 141,168 106,900 100,956 87,740 91,794 Estimated cost of equity %
Fixed Assets Net 2,988 2,238 1,503 1,167 1,027 Assumed terminal value growth rate 3.0%
Intangibles 2,090 1,520 1,520 1,520 1,520 NPV of Dividends $2.15
Deferred Tax 1,442 2,736 2,736 2,736 2,736 Price target discount to NPV 0%
Total Non-Current Assets 147,688 113,394 106,715 93,163 97,077 DDM-based price target $2.15
Total Assets 218,849 179,178 194,613 199,351 218,288
Trade and Other Payables 13,015 7,210 8,434 8,922 9,508 2. Book value
Payables Under Sales Contracts 1,064 1,103 1,103 1,103 1,103
Current tax Liability 0 727 727 727 727 Price/book value target (x) 1.25x 1.25x 1.25x 1.25x
Short term provisions 2,455 1,746 1,746 1,746 1,746 Price/book value target implied price $2.10 $2.44 $2.63 $2.84
Interest Bearing Liabilities 7,376 52 52 52 52 Target book value $2.44
Total Current Liabilities 23,910 10,838 12,062 12,550 13,136
Financial liabilities 120,000 81,830 85,505 84,664 96,746 Price target (average of NPV and FY10F book value) $2.29
Long term provisions 65 87 63 63 63 Premium/(discount) to current share price 38.9%
Deferred Tax Liabilities 8,622 7,626 6,435 4,768 3,454 Dividend yield 2.4%
Total Liabilities 152,597 100,381 104,066 102,045 113,399 Total 12-mth return 41.3%
Net Assets 66,252 78,797 90,547 97,306 104,889 BBY recommendation BUY
Net assets per share $1.52 $1.79 $2.05 $2.20 $2.37
PE ratio 6.7x 5.5x 4.3x 3.9x Implied PE of price target 9.9x 8.1x 6.4x 5.7x
PEG ratio 6.7x 0.3x 0.2x 0.5x
Source: Company Reports, BBY
Source: BBY, Company Reports

3. b
BBY Limited 24 August 2009 3
CREDIT CORP GROUP LIMITED
Outlook
We expect alpha to
be driven by:
(i) price/book
re-rating; and
(ii) continued
operating efficiency.
CCP has executed most of the turnaround steps we previously identified in BBY’s “Corporate Turnaround
ROAD MAP”, 13 August 2008 (litigation risk remains). Despite reduced gearing and lower purchased debt
ledger (PDL) acquisitions, CCP has managed to drive increased EPS through:
(i) Staff productivity (staff revenue/hour increased from A$207 FY08 median to A$222 FY09); and
(ii) Harvesting older ledgers (50% 4Q revenue from 2 year+ old PDLs, vs 14% in 1Q07). Charts 1 and 2.
CCP is now well positioned for future PDL acquisitions. Whilst de-leveraging and improving core
operations, the macro outlook has (serendipitously) improved such that the risk of overpaying for PDLs is
greatly ameliorated. We previously concluded that if this cycle’s peak unemployment is less than 6.7%,
then PDL prices are currently at about fair value, (refer BBY Note, “Strong operational momentum despite
challenging headwinds”).
Henceforth, we expect alpha to be driven by: (i) continued price/book re-rating; and (ii) ongoing operating
efficiency. We analyse price/book rating and the FY09 result below.
Table 1 below summarises the CCP investment case.
TABLE 1: SUMMARY INVESTMENT CASE
BULL CASE BEAR CASE
Price-value discount. Current trading price
implies: -
- 1.0x FY10 price/book; and
- 6.0x FY10F PE.
High DCF sensitivity to total expected
collection (TEC) multiple.
Corporate turnaround momentum –
- de-leveraging balance sheet;
- operational momentum: (i) EPS up 83%,
despite PDL acquisitions falling 51.5%; and
(ii) Staff revenue/hour up from FY08 A$207
median to FY09 A$222.
- New Board and management have driven
the turnaround.
Litigation risk. This appears mitigated by:
(i) CCP’s resolve to defend its position; and
(ii) possibly insured.
PDL acquisition risks diminishing
- with improved unemployment outlook. Refer
BBY Note 15 July 09 for detailed analysis of
unemployment vs PDL purchasing risks,
“Strong operational momentum despite
challenging headwinds”.
Increasing annuity income (via payment
arrangements). This has increased from 45% in
Dec 07 to 65% in June 09.
Source: BBY

4. b
BBY Limited 24 August 2009 4
CREDIT CORP GROUP LIMITED
CHART 1: EPS VS PDL ACQUISITIONS
-
20
40
60
80
100
120
140
2003 2004 2005 2006 2007 2008 2009
A$M
0
5
10
15
20
25
30
35
40
45
50
cps
PDL Acquistions (A$M) LHS Diluted EPS (cps) RHS
Source: BBY, CCP
CHART 2: NET DEBT/PDL CARRYING VALUE (%)
-
20
40
60
80
100
120
140
160
2003 2004 2005 2006 2007 2008 2009
A$M
0
10
20
30
40
50
60
70
80
%
PDL Acquistions (A$M) LHS
Net Debt (A$M) LHS
Net Debt/PDL carrying value (%) RHS
Source: BBY, CCP
Relative Value Analysis
We expect continued
price/book re-rating.
We expect continued price/book re-rating because: (i) the current 1.0x is not justified as it attributes zero
value to CCP’s business franchise; and (ii) the re-rating of major financial stocks will eventually flow
through to second line financials like CCP.
Major banks provide
a valuation
benchmark (ceiling)
for CCP.
Australian major bank stocks provide a relative valuation benchmark for CCP because:
(i) Both are financial services businesses;
(ii) CCP acquires its debt ledgers from major banks; and
(iii) The bad debt cycle/ rising unemployment is a key risk for both.
Major bank stocks currently trade at an average of 1.7x FY10F price/book. CCP should trade at a
discount to the banks given CCP’s characteristics:
Price taker in a competitive market − This compares to the major banks’ oligopoly and pricing power.
Low earnings diversification − CCP has one main revenue line, whereas major banks have seven to
eight.

5. b
BBY Limited 24 August 2009 5
CREDIT CORP GROUP LIMITED
Relative scale.
Low annuity income/earnings visibility − Whilst major banks generate annuity-style revenues from
annual fee income, wealth management, insurance and mortgages/long-dated debt facilities, CCP’s
earnings are much less transparent, particularly given the high DCF valuation sensitivity to the total
expected collection (TEC) multiple.
We believe CCP
should trade at
1.2-1.3x FY10F
price/book.
We believe that CCP should trade at 1.2-1.3x price/book given:
(i) Current major bank sector average of 1.7x.
(ii) Expected further re-rating of major financial stocks. Major bank stocks generally trade at a discount
to their historic price/book range during the bad debt cycle. (For a more detailed assessment of
major banks historic price/book trading ranges, refer BBY Note, 15 Apr 09, “Price v Value in bank
sector”).
(iii) ROE is improving. Stabilisation of the operating platform warrants some value attribution for the
CCP business franchise, and arguably a reduced cost of equity capital. 1.3x price/book requires
cost of equity/ROE combinations in the range of 15% Ke/19.5% ROE to 17.5% Ke/22.8% ROE.
BBY’s forecasts ROE to reach 24.9% in FY13F. Tables 2 and 3.
TABLE 2: PRICE/BOOK VS INVESTORS’ MINIMUM REQUIRED RETURN
Investors' minimum required return (%) 10 15 16 17 17.50 18 19 20
Sustainable ROE (%) 20 20 20 20 20 20 20 20
Implied price/book 2.0x 1.33x 1.25x 1.18x 1.14x 1.11x 1.05x 1.0x
Source: BBY
TABLE 3: ROE FORECASTS
2009A 2010F 2011F 2012F 2013F
ROE 14.6% 15.9% 17.8% 18.4% 21.2%
Source: BBY
FY09 Result Summary
CCP’s FY09 result was overall in line with BBY forecasts. Table 4 summarises the results, FY10F
guidance and BBY FY10F. Table 4 summarises the investment case.
TABLE 4: FY09 RESULTS
FY09 result Actual
FY08
Actual
FY09
BBY
FY09F
FY09 vs
FY08
FY10
guidance
BBY FY10F
PDL acquisitions A$76.7M A$37.2M A$35.3M -51.5% A$45-60M A$60M
Revenue A$149.9M A$155.8M A$151.7M 3.9% - A$159.0M-
NPAT A$5.8M A$10.9M A$10.6M 87.9% - A$12.9M
EPS (basic) 13.27 cps 24.26 cps 24.0cps 82.8% 25-29cps 29.3cps
ROE 8.5% 14.6% 14.2% 71.8% - 15.9%
Dividend 4 cps 4 cps 5 cps - 5-6 cps (20%
DPR policy)
6 cps
Source: BBY, CCP

6. b
BBY Limited 24 August 2009 6
CREDIT CORP GROUP LIMITED
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