US Productivity And Wizard Credit Card Will Shape Mixed Prospects

Key Takeaways

• Operational improvements and strategic purchasing efforts support sustained revenue and future earnings growth across key markets.
  
• New digital and auto lending initiatives present significant opportunities for revenue expansion and loan book growth.
  
• Market competition, loan volume moderation, external conditions, and stabilization in debt buying present challenges to Credit Corp's revenue and earnings growth.

Catalysts

Engages in the provision of debt ledger purchase and collection, and consumer lending services in Australia, New Zealand, and the United States.

• Continued operational improvements in the U.S., with a notable 28% increase in productivity, allow Credit Corp to expand purchasing without increasing headcount, positively impacting future earnings growth.
  
• Stabilization in the Australia and New Zealand debt purchasing business and strategic purchasing efforts are expected to maintain future collections and earnings, contributing to sustained revenue.
  
• The introduction of the Wizard digital credit card and potential expansion into the auto lending market, aligned with falling used car prices, present significant opportunities for revenue and loan book growth.
  
• Maintenance of strong credit metrics and responsible lending practices ensures the integrity of the lending business, supporting net margins and future earnings growth.
  
• The company has low gearing and significant undrawn borrowing capacity, allowing flexibility for investment in growth opportunities, likely enhancing future revenue and earnings.

Credit Corp Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Credit Corp Group's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.3% today to 17.5% in 3 years time.
• Analysts expect earnings to reach A$98.6 million (and earnings per share of A$1.44) by about July 2028, down from A$107.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$118.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.9x on those 2028 earnings, up from 9.7x today. This future PE is greater than the current PE for the AU Consumer Finance industry at 12.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.05%, as per the Simply Wall St company report.

Credit Corp Group Future Earnings Per Share Growth

Risks

• The competitive nature of the market for credit-impaired consumers may affect Credit Corp's ability to achieve superior analytics and maintain responsible operations, which could impact revenue and earnings growth.
  
• Moderation in loan volumes, particularly Wallet Wizard loans, suggests potential stagnation in revenue from the lending segment if new products do not maintain growth momentum.
  
• The reliance on external conditions and consumer market trends, such as potential declines in used car prices, introduce uncertainty that could affect future revenues and net margins in auto lending.
  
• Stabilization rather than growth in the Australia and New Zealand debt buying business indicates potential risks to maintaining or increasing revenue and net margins from this part of the business.
  
• The expectation of reduced net lending compared to previous years could affect future earnings growth, especially if investment opportunities that require leveraging undrawn borrowing capacity fail to materialize.

Valuation

• The analysts have a consensus price target of A$19.478 for Credit Corp Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$25.18, and the most bearish reporting a price target of just A$16.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$564.7 million, earnings will come to A$98.6 million, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 8.0%.
• Given the current share price of A$15.22, the analyst price target of A$19.48 is 21.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.