Bell Potter research report on Pioneer Credit 28 August 2014

28 August 2014
Analyst
Sam Byrnes 612 8224 2886
Pioneer Credit (PNC)
Step one complete
Authorisation
TS Lim 612 8224 2810
44% EPS growth visible in FY15
Recommendation
Buy (unchanged)
Price
We believe that PNC is positioning itself for long-term sustainable earnings growth.
The main factors likely to contribute to PNC’s growth include:
$1.60

Growth in contracted debt purchases: PNC has stated that 100% of its
forecasted debt purchases are contracted through Forward Flow agreements.

Differentiated customer centric model: We believe that PNC’s customer
centric model will ensure both PNC’s supply of debt portfolios and positive
outcomes with its customers.

Immature customer payments book: The nature of the payments profile means
that the book should continue to deliver growth as it matures.

Growing Payment Arrangement book: PNC’s Payment Arrangement book is
now sitting at $97.8m. This is up from $46.4m in FY12. PNC’s Payment
Arrangement book indicates the level of quality customers that it has and gives
greater customer payment security and therefore security of revenues into the
future. Result highlights
Target (12 months)
$1.95 (previously $1.80)
Expected Return
Capital growth
21.9%
Dividend yield
4.6%
Total expected return
26.4%
Company Data & Ratios
Enterprise value
$75.5m
Market cap
$72.6m
Issued capital
45.4m
Free float
60%
The key highlights of PNC’s FY14 results were:
Avg. daily val. (52wk)
$19,520
12 month price range
$1.55 - $1.66

FY14 proforma NPAT $4.6m (BPe $4.5m)
Diversified Financials

FY14 debt portfolio acquisitions of $31.6m (BPe $30.2m)

FY15 NPAT guidance unchanged of $6.6m (BPe $6.6m)

Dividend of 3.1 cps (BPe 3.1 cps)
GICS sector
Disclosure: Bell Potter Securities acted as CoLead Manager in PNC's Initial Public Offering
(IPO) and received fees for that service.
Price Performance
Price (A$)
Absolute (%)
Rel market (%)
(1m)
1.56
5.77
4.63
Investment view, BUY, Price Target $1.95 up 8%
(3m)
1.58
4.43
1.20
(12m)
Absolute Price
We have left earnings largely unchanged following PNC’s FY14 result. Our valuation
remains a blend of Free Cash Flow Yield, PE ratio and EV/EBIT based on FY15
earnings. Our Price Target has increased to $1.95 (previously $1.80) due to multiple
expansion in its Peer group, (mainly CCP, CLH, and TGA). We have retained our BUY
rating.
Earnings Forecast
$1.7
$1.7
$1.6
Jun Year end
2014
2015e
2016e
2017e
Sales (A$m)
25.8
39.1
51.4
58.5
EBITDA (A$m)
8.3
10.9
15.2
17.9
EBIT (A$m)
7.9
10.3
14.4
17.0
NPAT (normalised) (A$m)
4.6
6.6
9.2
10.3
10.1
14.6
20.4
22.6
n/a
44.1%
39.7%
11.1%
7.1
EPS normalised (cps)
$1.6
EPS normalised growth (%)
PER (on normalised EPS) (x)
$1.5
Apr May Jun Jul 14 Jul 14 Aug
14 14 14
14
PNC
S&P 300 Rebased
15.8
11.0
7.9
EV/EBITDA (x)
9.1
6.9
5.0
4.2
Dividend (¢ps)
3.1
7.3
10.2
11.3
Yield (%)
1.9%
4.6%
6.4%
7.1%
Franking (%)
100%
100%
100%
100%
FCF yield (%) - normalised PDLs
14%
8%
7%
15%
ROE (%)
9.6%
13.3%
17.0%
17.3%
SOURCE: IRESS
SOURCE: BELL POTTER SECURITIES ESTIMATES
BELL POTTER SECURITIES LIMITED
ACN 25 006 390 7721
AFSL 243480
DISCLAIMER AND DISCLOSURES
THIS REPORT MUST BE READ WITH THE DISCLAIMER
AND DISCLOSURES ON PAGE 6 THAT FORM PART OF IT.
Page 1
Pioneer Credit (PNC)
28 August 2014
Result highlights
FY14 result slightly ahead
st
PNC released its FY14 result today. This result is its first since listing on the ASX on 1
May 2014. Below is a summary of the result. Note our FY14 Profit and Loss estimates are
in-line with prospectus forecasts.
Figure 1 - FY14 results summary
Result vs PcP
FY13
Change
Result vs Forecast
FY14e
Variance
Pro-forma
Year end 30 June
FY14
Revenue
Cash customer payments incl. other revenue
Change in fair value
Consolidated revenue
37.6
-11.8
25.8
23.4
-6.8
16.6
60.5%
74.4%
54.8%
37.0
-11.7
25.3
1.6%
1.0%
1.8%
Cash collections slightly ahead
-17.4
-46.4%
-10.5
-44.7%
66.6%
-17.9
-48.4%
-2.6%
Lower operating expenses
EBITDA
8.3
6.2
34.8%
7.4
12.3%
D&A
-0.4
-0.4
0.8%
-0.4
-1.0%
EBIT
Net interest expense/income
Pre-tax profit
Tax expense
NPAT
7.9
-1.4
6.5
-1.9
4.6
5.8
37.0%
7.0
-0.6
6.4
-2.0
4.5
13.0%
140.5%
1.1%
-2.0%
2.4%
32.3%
30.8%
25.2%
17.8%
-30.4%
37.1%
34.9%
29.0%
19.8%
-31.8%
Operating expenses
Opex as a % of customer pmts
EBITDA margin
EBIT margin
Pre-tax margin
NPAT margin
Effective tax rate
Diluted EPS
10.1
Total dividend (cps)
Payout ratio (on diluted EPS)
Franking
3.1
31%
100%
0.0
0%
100%
Comment
Higher interest costs
Slight beat
29.3%
27.8%
25.4%
17.7%
-30.4%
9.9
2.4%
3.1
31%
100%
0.0%
Dividend as expected
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES
The key points of focus are:

FY15 Prospectus guidance reaffirmed: PNC has reaffirmed its prospectus guidance
of FY15 NPAT of $6.6m. This equates to EPS of 14.6 cps and puts PNC on a forward
PE ratio of 11.0x.

$31.6m in FY14 debt purchases: PNC has confirmed that it acquired $31.6m in debt
portfolios in FY14 up 19.5% on FY13.

FY14 guidance achieved: PNC has reported a pro-forma FY14 NPAT of $4.6m
adjusted for costs associated with the IPO and other one-offs. This compares to its
Prospectus forecast of $4.5m. Statutory NPAT came in at $1.0m, below expectations
due to a number of one-offs.

Strong earnings growth set to continue: PNC delivered strong earnings growth in
FY14 with pro-forma NPAT up 39.3% on pcp. Guidance for FY15 also suggests strong
earnings growth, with NPAT expected to grow 44% to $6.6m.

Dividend: PNC declared its maiden dividend of 3.1c per share reflecting 50% of proforma NPAT for 2HFY14. Going forward PNC has stated that it intends to distribute
50% of statutory NPAT per annum, indicating a total dividend of 7.3cps in FY15.
Page 2
Pioneer Credit (PNC)
28 August 2014
FY15 shaping up nicely
Growth drivers evident
Today’s result highlights PNC’s ability to forecast its business and increases our
confidence that it will achieve FY15 prospectus forecasts. We believe that PNC is
positioning itself for long-term sustainable earnings growth. The main factors likely to
contribute to PNC’s growth include:
Growth in contracted debt purchases: PNC has a number of forward flow agreements
with banks and non-bank lenders that will continue to supply debt portfolios to PNC. PNC
has stated that 100% of its forecasted debt purchases are contracted through Forward
Flow agreements.
Differentiated customer centric model: We believe that PNC’s customer centric model
will ensure both PNC’s supply of debt portfolios and positive outcomes with its customers.
Immature customer payments book: Beginning in FY10, PNC’s debt portfolio is
relatively immature. The nature of the payments profile means that the book should
continue to deliver growth as it matures.
Growing Payment Arrangement book: PNC’s Payment Arrangement book is now sitting
at $97.8m. This is up from $46.4m in FY12. PNC’s Payment Arrangement book indicates
the level of quality customers that it has and gives greater customer payment security and
therefore security of revenues into the future. We believe that PNC’s success it growing its
Payment Arrangement book is as a direct result of its customer centric business model and
anticipate it continuing to grow into the future.
Figure 2 - Debt Portfolio Investment
Figure 3 - Payment Arrangement Book
40.0
30.0
20.0
10.0
26.5
37.9
31.6
16.6
0.0
2012
2013
PDL purchases - LHS
2014
12.0
120
10.0
100
8.0
80
6.0
60
4.0
40
8.1
2.0
20
38.3
0.0
0
2015e
EBIT ($m) - RHS
25.2
14.5
FY12
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES
72.6
56.4
FY13
FY14
SOURCE: COMPANY DATA
Earnings changes
We have left earnings largely unchanged following PNC’s FY14 result. While the result was
above expectations, FY15 growth expectations are high and this result has increased our
confidence in PNC achieving them. Our valuation remains a blend of Free Cash Flow
Yield, PE ratio and EV/EBIT based on FY15 earnings. Our Price Target has increased to
$1.95. (previously $1.80) due to multiple expansion in its Peer group, (mainly CCP, CLH,
and TGA). We have retained our BUY rating.
Figure 4 – Price Target changes
Old (6 August)
New (28 August)
Valuation
Weighting
Price Target
Valuation
Weighting
Price Target
FCF Yield
$1.88
40%
$0.75
$1.90
40%
$0.76
PE Ratio
$1.79
30%
$0.54
$1.94
30%
$0.58
EV/EBIT
$1.74
30%
$0.52
$2.05
30%
$0.61
Total
$1.81
$1.96
Price Target
$1.80
$1.95
SOURCE: BELL POTTER SECURITIES ESTIMATES
Page 3
Pioneer Credit (PNC)
28 August 2014
Pioneer Credit
Company description
Pioneer Credit’s (PNC) primary business is acquiring and servicing unsecured retail debt
portfolios in the Purchased Debt Ledger (PDL) Market. It is headquartered in Perth and has
representative offices in Sydney, Melbourne, Brisbane and the Philippines. PNC's debt
purchases focus predominantly on credit card and personal loan accounts that are
generally more than 180 days overdue. PNC does not invest in telecommunications or
utility debt.
Investment strategy
We believe existing Forward Flow Agreements from debt vendors combined with its
differentiated customer centric model will underpin PNC’s strong earnings growth over the
next three years. We are confident that PNC has the funding in place and the ability to
execute on its stated strategy.
Valuation
We generate our valuation using a blend of Free Cash Flow Yield, PE ratio and EV/EBIT to
arrive at a 12-month Price Target of $1.95.
Risks
Risks facing PNC include but are not limited to:

Debt Pricing: PNC prices debt based on the amount it estimates it can collect. A lower
rate of collection could result in PNC not meeting its targeted rate of return on its
Purchased Debt Ledgers.

Key Forward flow agreement: In the past, 85% of the debt purchased by PNC was
from one financial group. Should PNC lose this Forward Flow Agreement, there would
be severe reductions to the supply of debt to PNC. Since IPO, PNC has signed new
clients that will diversify its supply of debt ledgers.

Low visibility on pricing model: Investors have limited visibility on whether the
company is compromising future returns by overpaying for assets to increase market
share. We have no real see through on this and rely on the expertise of management.

Execution of new product and service offering: PNC has indicated that it intends to
broaden its service offering. The amount of investment (capital and operational)
required, depending on the offering, could hamper its performance.

Availability of debt for purchase: PNC’s growth is reliant on the Banks’ propensity to
sell its aged debtors and its inclination to sell to PNC. PNC has in place forward flow
agreements to mitigate this risk.

Efficiency of staff collection: The profitability of PNC relies on the efficiency of its
people to collect its outstanding debt.

Increased competition: New competition entering the PDL market could drive up
prices and put pressure on margins. There is little evidence of pricing pressure on PNC
to date.

Regulatory risk: PNC operate within a heavily regulated industry. Changes to the
regulatory environment could have a material impact on PNC’s future financial
performance. Changes in regulations often bring added costs associated with achieving
compliance of new laws.
Page 4
Pioneer Credit
Recommendation
Price
Target (12 months)
as at 28 August 2014
Pioneer Credit (PNC)
Buy
$1.60
28 August 2014
$1.95
Table 1 - Financial summary
Jun Year end
Profit & Loss (A$m)
Sales revenue
. . . Change
EBITDA (pre PDL amortisation)
. . . Change
EBITDA (post PDL amortisation)
. . . Change
Deprec. & amort.
EBIT
Net Interest
Pre-tax profit
Tax expense
. . . tax rate
Associates
Minorities
Underlying Net Profit
. . . Change
Abs. & extras.
Reported Profit
2013
2014
2015e
2016e
2017e
16.6
74.0%
12.9
61.7%
6.2
91.4%
(0.4)
5.8
25.8
54.8%
20.1
55.5%
8.3
34.8%
(0.4)
7.9
(1.4)
6.5
(1.9)
29%
4.6
51.4
31.5%
41.7
42.8%
15.2
39.4%
(0.8)
14.4
(1.1)
13.3
(4.0)
30%
9.2
39.7%
9.2
58.5
13.8%
48.7
16.8%
17.9
17.6%
(0.9)
17.0
(2.2)
14.8
(4.5)
30%
10.3
11.1%
10.3
3.3
(3.5)
1.0
39.1
51.8%
29.2
45.0%
10.9
30.9%
(0.6)
10.3
(0.8)
9.5
(2.9)
30%
6.6
44.1%
6.6
2013
2014
2015e
2016e
2017e
EBITDA (pre PDL amortisation)
Change in working capital
Gross operating cash flow
Net interest
Tax
Operating Cash Flow
Capex
Purchase of PDLs
Free Cash Flow
Acquisitions
Disposals
Dividends paid
Equity
Net change in cash
20.1
6.2
26.4
(0.6)
(3.2)
22.5
(0.7)
(31.6)
(9.8)
(0.3)
(3.9)
41.2
27.2
29.2
(0.6)
28.6
(0.8)
(2.8)
25.0
(0.7)
(37.9)
(13.6)
(2.1)
(15.7)
41.7
(4.1)
37.6
(1.1)
(4.0)
32.4
(0.7)
(45.0)
(13.3)
(4.9)
(18.2)
48.7
0.6
49.3
(2.2)
(4.5)
42.6
(0.9)
(40.0)
1.7
(4.9)
(3.2)
Balance Sheet (A$m)
Cash
Receivables
PDLs
Other current assets
Current Assets
Fixed Assets
Intangibles
PDLs
Non Current Assets
Total Assets
Short term debt
Creditors
Provisions
Other curr liabilities
Current Liabilities
Long term debt
Other Non-curr liabilities
Non Current Liabilities
Total Liabilities
Net Assets
Share Capital
Reserves
Retained Earnings
Shareholders Equity
4.5
2.6
29.2
0.6
36.8
3.8
0.2
29.6
33.5
70.3
5.4
11.4
2.6
19.3
2.0
1.4
3.4
22.7
47.6
45.5
1.0
1.1
47.6
0.8
4.7
29.2
0.6
35.2
3.9
0.1
49.2
53.2
88.5
17.4
12.9
2.6
0.1
33.0
2.0
1.4
3.4
36.4
52.1
45.5
1.0
5.6
52.1
2.6
6.2
29.2
0.6
38.5
3.9
0.1
67.7
71.7
110.2
37.4
10.3
2.6
0.1
50.4
2.0
1.4
3.4
53.7
56.5
45.5
1.0
10.0
56.5
9.4
7.0
29.2
0.6
46.2
3.9
0.1
76.8
80.8
127.0
47.4
11.7
2.6
0.1
61.8
2.0
1.4
3.4
65.2
61.9
45.5
1.0
15.4
61.9
2.9
18.6
36.8
40.0
Jun Year end
Cashflow (A$m)
Net debt/(cash) $m
-
Price
Recommendation
Diluted issued capital (m)
Market cap ($m)
Target Price (A$ps)
Jun Year end
Valuation Ratios
Underlying EPS (¢ps)
. . . % change
PE (on underlying EPS) (x)
EV/EBITDA (x)
EV/EBIT (x)
$1.60
Buy
45.4
72.6
$1.95
2013
NTA ($ps)
P/NTA (x)
Book Value ($ps)
Price/Book (x)
DPS (¢ps)
. . . % pay-out
Yield (%)
Franking (%)
Performance Ratios
Revenue growth (%)
EBITDA growth (%)
EBITDA/sales margin (%)
EBIT/sales margin (%)
Gross cash conversion (%)
Free cash-flow yield (%)
FCF yield (%) - normalised PDLs
ROE (%)
ROIC (%)
74.0%
91.4%
37.1%
34.9%
106.4%
Leverage Ratios
Net interest cover (x)
Net Debt/EBITDA (pre-amort) (x)
Net debt/equity (%)
Net debt/net debt + equity (%)
Net borrowings/ PDL carrying value
Half yearly (A$m)
Sales revenue
EBITDA
Deprec. & amort.
EBIT
Interest expense
Pre-tax profit
Tax expense
. . . tax rate
Underlying Net Profit
Revenue drivers
Purchases
Cash Collections
Customer payments (book value)
Collections % of book
2013
26.5
22.6
(6.8)
15%
2014
2015e
2016e
2017e
10.1
15.8
9.1
9.5
14.6
44.1%
11.0
6.9
7.3
20.4
39.7%
7.9
5.0
5.2
22.6
11.1%
7.1
4.2
4.5
1.05
1.5
1.05
1.5
1.15
1.4
1.15
1.4
1.24
1.3
1.24
1.3
1.36
1.2
1.36
1.2
3.1
30.7%
1.9%
100%
7.3
50.1%
4.6%
100%
10.2
50.1%
6.4%
100%
11.3
50.0%
7.1%
100%
54.8%
34.8%
32.3%
30.8%
130.9%
-13.5%
13.8%
9.6%
11.0%
51.8%
30.9%
27.9%
26.4%
98.0%
-18.7%
8.3%
13.3%
11.9%
31.5%
39.4%
29.5%
28.0%
90.2%
-18.3%
7.1%
17.0%
12.3%
13.8%
17.6%
30.5%
29.0%
101.2%
2.3%
14.9%
17.3%
12.2%
5.5
0.1
6.2%
5.8%
5.0%
12.9
0.6
35.7%
26.3%
23.7%
12.9
0.9
65.2%
39.5%
38.0%
7.7
0.8
64.7%
39.3%
37.7%
1H14
11.1
7.9
2H14
14.6
12.2
1H15e
15.0
9.4
(0.3)
2.0
(0.0)
1.9
(0.6)
-30%
1.4
2H15e
24.1
19.8
(0.3)
8.4
(0.8)
7.6
(2.3)
-31%
5.3
2014
31.6
37.2
(11.8)
17%
2015e
37.9
57.4
(18.3)
19%
2016e
45.0
77.9
(26.5)
21%
2016e
40.0
89.4
(30.8)
23%
SOURCE: BELL POTTER SECURITIES ESTIMATES
Page 5
Pioneer Credit (PNC)
Recommendation structure
28 August 2014
Research Team
Staff Member
Title/Sector
Phone
@bellpotter.com.au
TS Lim
Head of Research
612 8224 2810
tslim
Sam Haddad
Industrials
612 8224 2819
shaddad
John O’Shea
Industrials
613 9235 1633
joshea
Hold: Expect total return between -5%
Chris Savage
Industrials
612 8224 2835
csavage
and 15% on a 12 month view
Jonathan Snape
Industrials
613 9235 1601
jsnape
Sam Byrnes
Industrials
612 8224 2886
sbyrnes
Sell: Expect <-5% total return on a
Bryson Calwell
Industrials Associate
613 9235 1853
bcalwell
12 month view
John Hester
Healthcare
612 8224 2871
jhester
Tanushree Jain
Healthcare/Biotech
612 8224 2849
tnjain
Buy: Expect >15% total return on a
12 month view. For stocks regarded
as ‘Speculative’ a return of >30% is
expected.
Speculative Investments are either start-up
enterprises with nil or only prospective
Industrials
Financials
operations or recently commenced
TS Lim
Banks/Regionals
612 8224 2810
tslim
operations with only forecast cash flows, or
Lafitani Sotiriou
Diversified
613 9235 1668
lsotiriou
companies that have commenced
Resources
operations or have been in operation for
Peter Arden
Resources
613 9235 1833
parden
some time but have only forecast cash
Stuart Howe
Resources
613 9235 1782
showe
flows and/or a stressed balance sheet.
Fred Truong
Resources
613 9235 1629
ftruong
Research Assistant
612 8224 2825
tpiper
Quantitative
Such investments may carry an
Tim Piper
exceptionally high level of capital risk and
volatility of returns.
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contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise)
suffered by the recipient of this document or any other person.
Disclosure of interest:
Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting
and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests
in the securities referred to in this document.
Disclosure: Bell Potter Securities acted as Co-Lead Manager in PNC's Initial Public Offering (IPO) and received fees for that service.
ANALYST CERTIFICATION
Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that
the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were
repared in an independent manner and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed by that research analyst in the research report.
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