As featured in Switzer Super Report
Pioneer Credit Limited (PNC.AX) is the smallest of the ASX listed purchasers of debt-ledgers (after Credit Corp and Collection House).A debt ledger is a collection of unpaid bills or other amounts, such as loan repayments or credit card bills. Companies such as PNC, Credit Corp and Collection House purchase debt ledgers, often at less than 20c in the dollar, from the big four banks, other financial institutions, Telstra and other utilities. Their objective is to recover the debts at a significantly higher rate than they purchased the debt for, thus realising a profit in the process.
How long have you held the stock?
For just over a year.
What do you like about it?
The stock meets our two main investment criteria:
- High quality: PNC is an emerging, growing, debt purchaser that has secured a circa 10% share of the Australian debt purchasing market. We view the company as high quality with a solid and aligned management team, a well-defined growth strategy, a strong balance sheet and shareholder-friendly dividend policies.
- Significantly under-valued: The company recently reported a net profit after tax for FY16 of $9.5m – up 24%. PNC has provided guidance for its FY17 profit of at least $10.5m. At the current share price of $1.79, this puts PNC on a PE of just over 8x FY17 earnings – a large discount to its two listed peers, Credit Corp (ASX:CCP) and Collection House (ASX:CLH). Our opinion of fair value implies significant upside in the company’s value.
How is it better than its competitors?
PNC is focused upon acquiring debts with ‘long dated’ collection profiles (primarily personal loans and credit cards debts), which enables PNC to develop deeper relationships with its customers over a longer period of time. This is in contrast to telecommunication and utility debts, which are often one-off in nature and thus don’t provide an opportunity to build a longer term relationship with the customer.
The other advantage of having a longer collection cycle is that it provides PNC with a lower turnover portfolio, meaning that PNC is not under pressure to constantly replace/purchase more ‘short dated’ utility type debts.
What do you like about its management?
PNC was founded by Keith John in 1991 and was actually acquired by its competitor Credit Corp in 2006. Keith John subsequently reacquired PNC in 2009 and listed it on the ASX in 2014. John has significant experience in the industry, having led the company through a number of business cycles and remains the largest shareholder of PNC, with a 15% holding. We believe it is favourable for shareholders when a founder manages a business and retains a large shareholding.
What is your target price on the stock?
We believe that the combination of having a low profile in the investment community, trading on a low earnings multiple and having a growing earnings profile, offers substantial valuation upside. Our view of fair value evolves over time but it is fair to say we only invest in smaller companies when we can take a long term view and the valuation upside is high – that the share price can at least double over the medium term. We believe this is a fair expectation for PNC.
At what point would you sell it?
We would sell if we became uncomfortable with PNC’s earnings outlook (we monitor a number of operational metrics in this regard), or if we considered its pricing to be stretched relative its peers.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
The stock is trading at around the same levels as it was 12 months ago, whilst the underlying portfolio to the TAMIM Australian Equity Small Cap IMA is up by 30%. We have been progressively adding to our PNC position over the past 12 months to take advantage of the current low valuation.
Is it a liquid stock?
As with many smaller companies, liquidity is low but there is potential for liquidity to improve as the company’s profile and size increases. In our opinion the journey from il-liquid to more liquid is core to successful smaller companies investing.
Where do you see value?
With a PE of just over 8x FY17 earnings and a strong track record of earnings and dividend growth since listing on the ASX in 2014, PNC is priced on undemanding valuation metrics.
We expect PNC to continue to increase its investment in debt ledgers and grow its earnings on the back of the strong operational achievements it has made to date. PNC is also increasingly focused upon using its customer relationships to offer a wide range of new financial services products (including personal loans and credit cards), which have the potential to contribute meaningfully to its earnings growth over time.
We are high conviction shareholders in the stock and look forward to continued earnings growth and share price appreciation in the years ahead.
Happy Investing,
