Credit Corp Group Limited (ASX:CCP) Is Trading 17.97% Below Its True Value

February 15, 2019

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Pricing consumer finance stocks such as CCP is particularly challenging. Given that these companies adhere to a different set of rules relative to other companies, their cash flows should also be valued differently. For example, businesses that deal with loans are required to hold more capital to reduce the risk to shareholders. Focusing on line items like book values, in addition to the return and cost of equity, may be beneficial for assessing CCP’s value. Today I will show you how to value CCP in a relatively useful and uncomplicated way.

Check out our latest analysis for Credit Corp Group

What Model Should You Use?

Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. Australia's financial regulatory environment is relatively strict. In addition, consumer financials tend to not hold large portions of tangible assets as part of total assets. Excess Returns overcome some of these issues. Firstly, it doesn't focus on factors such as capex and depreciation - relevant for tangible asset firms - but rather emphasize forecasting stable earnings and book values.

ASX:CCP Intrinsic Value Export February 15th 19

Deriving CCP's Intrinsic Value

The central belief for Excess Returns is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. The returns above the cost of equity is known as excess returns:

Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)

= (0.23% – 8.5%) x A$7.95 = A$1.15

We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:

Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)

= A$1.15 / (8.5% – 2.3%) = A$18.69

Combining these components gives us CCP's intrinsic value per share:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= A$7.95 + A$18.69 = A$26.64

This results in an intrinsic value of A$26.64. Relative to the present share price of AU$21.85, CCP is currently fairly priced by the market. Therefore, there's a bit of a downside if you were to buy CCP today. Pricing is only one aspect when you're looking at whether to buy or sell CCP. Analyzing fundamental factors are equally important when it comes to determining if CCP has a place in your holdings.

Next Steps:

For consumer financials, there are three key aspects you should look at:

Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
Future earnings: What does the market think of CCP going forward? Our analyst growth expectation chart helps visualize CCP’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether CCP is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on CCP here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.