Collection House Limited

CLH Details

Completion of Debt Recapitalisation: Collection House Limited (ASX: CLH) provides debt collection and accounts receivables management services. The company completed the debt recapitalization process as on 24 December 2020 and trading of shares was resumed on January 4, 2021. The company has been engaged in a recapitalisation process since February 2020 when it entered a Standstill Agreement with its lenders. Trading of shares was halted during the time. CLH decided to sell certain Australian Purchase Debt Ledgers (PDL) assets to Credit Corp Group for the purchase price of $160 million. The company will also receive additional consideration of $15 million over the eight-year period depending upon the future performance of the asset. Proceeds from the sale transaction will be immediately deployed for the reduction of the company’s senior debt. The company’s existing lenders also agreed to provide a new 3-year senior debt facility of ~$45 million. Further, Credit Corp Group will provide CLH a short-term loan of $15 million for general corporate purpose. CLH is expecting to repay senior debt obligations of $197.2 million through sale proceeds after adjusting collection fees. 

Sources and Uses of Funds from Recapitalization Process: (Sources: Company Reports)

FY20 Financial Result Update: Collection House Limited reported a 7.4% drop in PDL business revenue and 3.7% in collections revenue in FY20 over prior year. COVID-19 impacted cash receipts from customers. Conservative approach by clients on outsourcing receivables management services affected business growth during the period. The company reached an agreement to sell all of its Australian PDL assets resulting in a pre-tax impairment loss of $111.5 million. As a result, CLH reported a net loss of $145.07 million in FY20 as compared to a net profit of $30.7 million in FY19. The company reported an operating cash flow of $65.3 million in FY20, down from $86.8 million reported in FY19. It had closed the period with a cash balance of $9.6 million as of June 2020.  

Outlook: The company expects to benefit from a substantial reduction in debt and thereby remains on track to eliminate financial risk. It is also expecting to benefit from the change in the business model for collections. It had retained PDLs from other markets (like New Zealand) and through the partnering model, it will lower the balance sheet risk.

Stock recommendation: The stock of the company resumed trading from January 4, 2021 after being suspended from February 2020. It had posted a negative return of ~70% since then. The stock is currently trading lower than the average of its 52-week high price of $1.120 and 52-week low price of $0.315. The company sold-off its substantial revenue generating Australian PDL business which represented about 64% of revenues in FY20. In addition, the stock is trading at a price/book value multiple at 0.70x, which appears far lower than Banking Services Industry Median of 1.4x and Financial Services Median of 1.3x.  Based on significant deterioration in share price as compared to trading levels seen before the suspension, sell-off of substantial revenue-generating business, and current trading levels, we are keeping a close eye on the upcoming annual shareholder meeting scheduled on January 21, 2021. The stock closed at $0.320, down by 5.883% on January 8, 2021. Investors with low-to-medium risk appetite may evaluate the scenario suiting their overall requirement.

CLH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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