Lowell - What the £325m tell us
All,
Please find our unchanged analysis here.
Apparently, we remain on the black-list, as once again we have been culled from the Q&A. However, noteworthy is the number £325m. This is the amount of portfolio purchases undertaken LTM, a period over which the book remains flat. There have been no overly significant write-offs over the last year, nor any other material anomalies. Thus - as we have always argued - while the company calculates its ERC replacement rate to be £250m, the ERC portfolio itself remains stable only at £325m.
Q2 and FY21:
- Because of the relatively high expense of working our new portfolios vs clipping annuity payments on older ones that have already been re-negotiated with delinquents, Cash EBITDA was always going to rise in a period where ERC growth would slow down. We do not see a significant up-tick in that growth - or the associate OpEx growth for the remainder of this financial year, even if the portfolio market begins to open up in Q4. However, we are concerned that margins next year will suffer with growing front-end business - even if portfolio GMMs improve in the forthcoming wave.
- The next time we will update our model (unless there is demand we may skip this financial year - for lack of any events) it may be worthwhile estimating how much of those 300bps
Cash Ebitda Margin improvement is due to the ageing of the portfolio, as opposed to actual improvement in cost basis.
Capital Structure:
- The company has entered into a second securitisation facility, broadly similar in terms as the first, but with a longer-term horizon and slightly more expensive.
- When asked on the call, management stated it was not looking to use it’s £655m (mountain) of liquidity to pay dividends. While we agree that this would amount to madness, it is good to hear.
Investment Considerations:
- Fundamental: The market remains hooked to the Cash Ebitda figure, again a metric we are not fans of. Using that metric, however, we continue to expect the company to re-lever in Cash Ebitda terms once the portfolio market re-opens, i.e. over 2022.
- Inflation: Should inflation rise materially, after all, the back-book might want to be more conservatively valued.
- Both aspects above might give us cause to evaluate the bonds from a short perspective later this year if the market remains as tight as it is now. Until then we do not see much going wrong.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003