Financial services provider Credit Intelligence (ASX: CI1) is eager to benefit from Australia’s current economic recession through its timely acquisition of Sydney-based debt negotiation business Chapter Two Holdings.
The Hong Kong and Singapore-based lender has had its sights set on expanding into Australia for some time and at the start of June announced a share purchase agreement to acquire a 60% stake in the private firm.
Speaking with Small Caps, Credit Intelligence chairman Jimmie Wong said the timing of the acquisition was ideal since the company’s “counter-cyclical business model” enables it to capitalise on Australia’s coronavirus driven recessionary phase.
“When the economy is bad, more people will require financial solutions,” he said.
“Chapter Two is a small company with a big potential for growth in the coming months as Australians experience financial trouble,” Mr Wong added.
Chapter Two acquisition and other opportunities
Chapter Two offers hardship assistance, reduced debt settlements and long-term financial arrangements to Australians unable to maintain their outstanding debts.
Under the terms of the deal, Credit Intelligence will make a cash payment of $400,000 on completion of the transaction and issue $320,000 in shares over three years, based on Chapter Two achieving a profit guarantee of $300,000 per annum.
Completion of the acquisition is anticipated on 1 July 2020, subject to due diligence and regulatory approvals.
“Having reviewed a number of potential Australian acquisitions over the last two years, we are excited to be partnering with and investing in Chapter Two to unlock its significant growth potential, and continuing our Asia Pacific expansion strategy,” Mr Wong said.
While the deal marks the first Australian acquisition, Credit Intelligence is actively seeking acquisitions or joint ventures with plans to launch an “aggressive marketing campaign” across the country.
Earlier this month, the company revealed it was reviewing a larger loan and mortgage business in Australia, as well as a “substantial” credit management business in Hong Kong in line with its Asia Pacific focus.
Capitalising on the COVID-19 induced downturn
Although Australia is starting to show signs of recovery as its staged easing of restrictions continue, analysts expect it to take some time before the economy returns to pre-COVID-19 levels.
According to estimates by research firm Roy Morgan, about 2.1 million Australians were unemployed in early June, equivalent to about 8% of the nation’s population.
Many businesses, particularly in the retail and travel sector, may not recover despite the easing of lockdown measures and Australia’s summer bushfires also had an adverse effect on businesses before the coronavirus pandemic.
The country has one of the highest private household debt levels in the world – almost double its household disposal income level, according to the Reserve Bank.
The Australian Banking Association also revealed in May that one in 14 mortgages were granted repayment breaks due to financial hardship associated with the pandemic.
Mr Wong said Credit Intelligence is poised to benefit from Australia’s current debt levels as the company’s operating model is designed to perform better under adverse economic circumstances.
“I foresee there will be a fall in the property prices in Australia and many people will lose jobs or have a fall in income, so many people will have trouble repaying their mortgage and debts,” Mr Wong said.
“In good times, we can still perform because there are still people who need financial support; but in bad financial times, we can do a lot better,” he added.
Mr Wong also noted Chapter Two’s ability to service clients online and as such, could continue operating despite any future pandemic-related restrictions and without offices in every Australian capital city.
He said its online operating model also reduces the company’s labour cost or rental burden, thereby increasing its profitability potential.
Singapore and Hong Kong operations
Mr Wong said Credit Intelligence’s Hong Kong operations did not stop during the coronavirus outbreak and while its Singapore operations were disrupted for nearly two months, they have now resumed as normal.
He said due to the political unrest in Hong Kong over the last six months and the impact of COVID-19, the company expects a large increase in bankruptcies in the coming years.
“There may be double or triple the number of bankruptcy cases in Hong Kong in the coming months,” Mr Wong said.
He added that an influx of money flowing from Hong Kong to Singapore due to the Chinese city’s political crisis could mean more revenue for its Singaporean operations.
Last week, Credit Intelligence reaffirmed its profit guidance for the 2020 financial year of A$13.5 million, up 125% on fiscal 2019.
The company has also forecast a net profit after tax of about A$2.6 million, which would represent a 420% increase over the prior year.