Stock Focus Pioneer Credit (PNC) Tuesday, 12 April 2016. $2.03 $2.48 $1.69 Share Price $2.82 Positive Neutral Negative Trading Data Last Price $1.70 12 month range $1.53 - $1.85 Market Cap $78m Free Float $48m (62%) 12 month return (historical) 2.8% <insert text here> WHAT SURPRISED? PNC has raised $5.8m in new equity at $1.70 per share (last sale 11 April 2016 $1.695). The funds will be used to accelerate the Company s growth through the acquisition of further parcels of consumer debt. In recent updates PNC has indicated that the PDL purchasing environment is changing, with the intensity of competition waning. This follows a period of higher prices being paid for debt parcels. For the most part this has been an issue for PNC s competitor base, with the Company remaining disciplined with its investment process. Importantly PNC maintains its purchasing guidance of at least $42m in FY16. As such the capital raising supports growth in FY17. This is consistent with previous communications by the company that it expects solid growth in purchases, at appropriate price points, through FY17. EAP forecasts FY17 purchases of $49m, an increase of 17% on FY16. PNC has also reiterated FY16 NPAT guidance of at least $8.8m. WHAT'S CHANGED? Incorporating the share placement our FY16E and FY17 EPS declines 2% and 4% respectively. Despite the purpose of the raising we leave our PDL purchase forecast of $49m for FY17 unchanged at this stage. Valuation remains unchanged at $2.26, with increases in relative multiples since last publication offsetting the dilution of the share placement. WHAT NOW? PNC remains our top pick among the receivables management companies. Importantly the Group differs from its industry peers with an approach premised on understanding its customers circumstances rather than aggressively pursuing collections. As a result the Company typically receives payment over a longer period of time 6-10yrs. However the pay-off is improved recoveries of around 3x PDL investment. In addition, the Company s investment process concentrates on bank related debt and avoids many of the lower quality debt parcels such as account billings (telcos & utilities). As a relatively smaller but growing player, PNC can also benefit from smaller purchases and afford to be more selective in its investment process. With the above in mind we maintain our Positive rating on PNC. <insert text here> Earnings Forecasts Yr to June 13A 14A 15A 16E 17E 18E EBITDA ($m) 6.4 7.9 12.8 16.6 20.1 25.7 Rep NPAT ($m) 3.9 1.0 7.8 9.0 10.8 13.8 Adj NPAT ($m) 3.9 4.6 7.8 9.0 10.8 13.8 EPS ( ) 10.2 17.4 19.5 22.0 28.0 EPS Gth (%) NM NM 70.4 12.1 12.7 27.3 PER (x) 16.7 9.8 8.7 7.7 6.1 PEG Ratio (x) 0.4 0.8 0.4 DPS ( ) 3.1 8.6 9.0 10.5 13.0 Yield (%) 1.8 5.0 5.3 6.2 7.6 Franking (%) 10 10 10 10 10 ROE (%) 1 15% 14% 16% 18% EV/EBITDA (x) 15.8 10.2 8.5 7.4 6.9 6.0 Net Debt/EBITDA (x) 3.6 0.4 2.4 2.7 3.1 2.9 Int. Cover (x) (10.8) (8.8) (14.8) (6.1) (5.9) (5.6) Valuation (blended) $2.26 Source: EAP Research PAGE 1 OF 5
PNC BALANCE SHEET CAPACITY The business of PDL investment and receivables management is a capital intensive business. Purchases must be made upfront, with the recovery of outstanding principal typically received over the course of next six-ten years. In addition, growth requires every increasing purchases. While we remain comfortable with PNC s debt servicing capacity, there are some limitations to growth with Net Debt/Debt + Equity at around 47% in FY17E. This is based on EAP s forecasts for $49m in PDL purchases for FY17. While we don t forecast revaluations of the PDL portfolio, PNC could also benefit from an upwards revaluation which would also allow for additional headroom. This is a unique and less visible element of the Group s valuation process given PNC adopts a fair value approach to its PDL valuations. In the last two years the Group has benefitted from upwards revaluations which have been carried through the profit and loss. Importantly EBIT interest cover is reasonable at 4.9x FY17E (EAP s forecasts). In short investors should not discount the prospect of future capital raisings, depending on PNC s growth in PDL purchases. Indeed, capital management is a natural function of any growth company in a capital intensive industry. PNC s Forecast PDL Purchases & Gearing Post Placement Source: Company Data, EAP Research PNC s Net DEBT:PDL Value Source: Company Data, EAP Research 60 50 Forecast PDL Purchases Net Debt / Net Debt + Equity RHS 5 180 160 140 Carrying Value of PDL Net Debt / PDL Value Bank Covenant Net Debt to PDL Value 55% 5 40 120 30 100 80 20 60 10 1 40 20 1 0 2014 2015 2016E 2017E 2018E 0 2014 2015 2016E 2017E 2018E EARNINGS & VALUATION While we have faith that PNC will put the $5.8m raised to work, we have not altered our FY17 purchasing forecasts of $49m. Incorporating the share placement our FY16 and FY17 EPS decline 2% and 4% respectively. Due to change in relative multiples since last publication our valuation remains unchanged at $2.26. EARNINGS REVISIONS Metric Revenue ($m) EBIT ($m) EPS pre Amort'n ( ) DPS ( ) Yr to June Old New % Chg Old New % Chg Old New % Chg Old New % Chg 2016E 46.9 46.9 15.5 15.5 19.9 19.5 (2%) 9.0 9.0 2017E 56.8 56.8 18.6 18.6 23.0 22.0 (4%) 11.0 10.5 (5%) 2018E 67.1 67.1 24.0 24.0 29.4 28.0 (5%) 14.0 13.0 (7%) Blended Valuation $2.26 $2.26 () Source: Company data, Evans & Partners Research estimates PAGE 2 OF 5
FINANCIAL SUMMARY Pioneer Credit PNC As at: 12/04/2016 Recommendation: Positive Share Price $1.70 Year end June 2015A 2016E 2017E 2018E INCOME STATEMENT Sales Revenue $m 39 47 57 67 Consolidated EBITDA $m 13 17 20 26 D&A $m 1 1 1 2 Consolidated EBIT $m 12 15 19 24 Net Interest $m 1 3 3 4 Tax Expense $m 3 4 5 6 Associates/Minorities $m 0 0 0 0 Adj NPAT $m 8 9 11 14 NRIs $m Reported NPAT $m 8 9 11 14 Shares on Issue (end period) m 45 49 49 49 EFPOWA m 45 46 49 49 EPS 17.4 19.5 22.0 28.0 DPS 8.6 9.0 10.5 13.0 Franking % 10 10 10 10 GROWTH/PROFITABILITY RATIOS Sales Growth % 50. 21.8% 21.1% 18. EBITDA Growth % 62.9% 29.2% 21. 27.9% EBIT Growth % 58.6% 29.9% 20.6% 28.6% EPS Growth % 70.4% 12.1% 12.7% 27.3% EBITDA/Sales % 33.3% 35.3% 35.3% 38.2% EBIT/Sales % 30.9% 32.9% 32.8% 35.7% EBIT Interest Cover x (14.8) (6.1) (5.9) (5.6) Tax Rate % 29.5% 30. 30. 30. ROE % 14.8% 14.3% 15.7% 18.1% ROFE % 14.2% 14.2% 14.3% 15.8% CASH FLOW EBITDA $m 30 36 47 57 Change in Working Capital $m (7) 0 0 0 Other $m 0 0 0 0 Gross Operating Cash Flow $m 23 36 47 58 Net Interest Paid $m (1) (3) (3) (4) Tax Paid $m (3) (4) (5) (6) Net Operating Cash Flow $m 18 30 39 47 Maintenance Capex $m (1) (1) (1) (1) Free Cash Flow $m 18 29 38 46 Dividends Paid $m (2) (4) (5) (6) Expansionary Capex $m (43) (45) (49) (54) Acquisitions $m Asset Sales $m Dividends Received $m Shares Issues/Buybacks $m Other $m 0 6 0 0 Increase in Net Cash/(Debt) $m (27) (15) (16) (14) GOCF/EBITDA % 76% 101% 101% 101% Total Capex/Sales % 113.4% 98.4% 88.9% 82.9% Total Capex/Depreciation x (46.6) (41.2) (35.5) (33.2) Source: Company data, E&P Research estimates Year end June 2015A 2016E 2017E 2018E VALUATION METRICS PER x 9.8 8.7 7.7 6.1 P/EG (2YR) x 0.8 0.4 Dividend Yield % 5. 5.3% 6.2% 7.6% EV/EBITDA x 8.5 7.4 6.9 6.0 EV/EBIT x 9.1 8.0 7.5 6.4 P/FCF x 4.4 2.7 2.0 1.7 P/BV x 1.4 1.3 1.2 1.1 BALANCE SHEET Assets Cash $m 2 2 2 2 Working Capital $m 35 59 71 83 PP&E $m 4 4 4 3 Intangibles $m 0 0 0 0 Investments $m 1 1 1 1 Other $m 84 111 134 157 Total Assets $m 95 122 145 168 Liabilities Debt $m 33 48 64 77 Working Capital $m 7 9 10 12 Other $m 1 1 1 1 Total Liabilities $m 42 59 76 92 Equity $m 53 63 69 76 Capital Employed $m 84 109 130 152 Net Debt/(Cash) $m 31 45 61 75 Net Debt/Equity % 58% 72% 89% 99% Net Debt/Debt+Equity % 36.7% 41.8% 47.1% 49.6% Net Debt/EBITDA x 2.4 2.7 3.1 2.9 Working Capital/Sales % 73% 106% 106% 105% D&A/PP&E % (21.7%) (27.7%) (38.6%) (51.5%) DCF VALUATION $m $/share Risk Free Rate 5.5% Enterprise Value 113 $2.28 Market Risk Premium 5.7% (Net Debt)/Cash (31) ($0.62) Beta 1.20 Franking Credits $0.39 WACC 9.2% DCF Valuation $2.05 Margin Trends 21% Return Trends Gearing & Interest Cover -4 38% 18% 5-6 36% 15% -8 34% 12% -10 32% 9% -12 6% 1-14 28% 3% -16 EBITDA/Sales EBIT/Sales ROE ROA ROFE - Reported Net Debt/Net Debt+Equity (%) EBIT Interest Cover (x) Source: Company data, E&P Research estimates PAGE 3 OF 5
Positive Neutral Negative Speculative Buy Suspended Not Rated Stock is expected to outperform the S&P/ASX 200 over the coming 24 months Stock expected to perform in line with the S&P/ASX 200 over the coming 24 months Stock is expected to underperform the S&P/ASX 200 over the coming 24 months Stock has limited history from which to derive a fundamental investment view or its prospects are highly dependent on event risk, eg. Successful exploration, scientific breakthrough, high commodity prices, regulatory change, etc. Stock is temporarily suspended due to compliance with applicable regulatory and/or Evans & Partners policies in circumstances where Evans & Partners is acting in an advisory capacity. Stock is not included in our investment research universe. Research Criteria Definitions Recommendations are primarily determined with reference to how a stock ranks relative to the S&P/ASX 200 on the following criteria: Valuation Earnings Outlook Earnings Momentum Shareholder Returns Debt Servicing Capacity Cyclical Risk Industry Quality Financial Transparency Rolling 12 month prospective multiples (composite of Price-to-Earnings Ratio, Dividend Yield and EV/EBITDA), or long-term NPV for resource stocks. Forecast 2 year EPS growth. Percentage change in the current consensus EPS estimate for the stock (rolling 1 year forward basis) over the consensus EPS estimate for the stock 3 months ago. Composite of forecast ROE (rolling 1 year forward basis) and the percentage change in ROE over 2 years. Rolling 12 month EBIT Interest Cover ratio. Qualitative assessment of the 2 year outlook for a stock/industry s profit cycle. Qualitative assessment of an industry s growth/returns potential and company specific management capability. If we don t understand it, we won t recommend it. For stocks where Evans & Partners does not generate its own forecasts, Bloomberg consensus data is used. Analysts can introduce other factors when determining their recommendation, with any material factors stated in the written research where appropriate. PAGE 4 OF 5
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