Surprising that no existing thread on Debtmatters (DEBT). Big run up this year and Shares are expecting more to come. Been watching for a while but recent news of accelrating expansion has encouraged me on board.

DEBT is a relative newcomer to the market: revenue up 230% to 2.44 at interims to Sept 2005 and pbt up 530% to 818K. In comparison DFD turnover to October 2005 (interims) more than doubled to 6.4m with pbt of 1.86m. DEBT achieved 200 IVA's for the first time in September: this became 344 in January and 534 in March. DFD has approaching 20% of the market which appears to be expanding at about the rate achieved by DFD as their share is constant. From this I deduce that DEBT has a way to go at its exceptional current growth rate. OK a pe around 90 appears high but two years could bring it to 30 and then 10.

From the charts there is terrific momentum in the climb. It may be that we have had two legs of a three-legged climb. Best to be on board for the journey!

Eric

Well done, sd for doggedly good figures. Shows there is an advantage in studying the Shares plays. The growth rate is significantly greater than DFD but one should question, I suppose, whether there is good reason for that remaining the case. There may be a good reason for March being out of line with the trend figures, typically the case with the last month of a financial year. But my ball-park figuring above gave two years of triple growth in pe, somewhat less than your figures. DFD claim aproaching 20% of the market on turnover presumably around 15m giving a market of 75m. DFDs market share is stable so that market as a whole is doubling right now giving 150m for next year (year just started). DFDs 20% would mean 30m turnover. With growth still ahead of the market, DEBT could be 20m, nearly 150% growth, giving them a 12.5% market share. That figure feels more likely than yours. It still implies a pe around 12 whereas it should be not less than 30 even with growth slowing, say, to 100%. I suspect the market will still be near doubling, partly due to the still growing debt problem but also that debtors will become more savvy realising there is a way out of their debt trap. That gives a price target of around 9 by June 2007.

The amazing thing is that no one on this Investors Room was there in any public way with DEBT. When I did my own research, my immediate reaction was to check up these threads only to find there wasn't one. jimmy B and big al have obviously discovered DEBT although the latter refers to having traded them: this is really a share to hold at least until the market has caught up with their potential value or the first sign that they are running out of steam. Once again, I have discovered the share a bit late so it will probably only be a 3-bagger for us.

Eric

Eric - spent a little longer on the figures today (whilst sitting in the middle of the Thames Barrier as it happens! great view of London).

From the interims and the two updates in Feb and Apr, the number of IVA's is pretty clear. I may have got Apr-Sep slightly overstated, but that is compensated for by a consequential reduction in per IVA revenue, since I divided the actual revenues for H1 by my estimated number of IVA's to get 2,265 - From the placing doc " The Company's fees of approximately 4,250 per domestic IVA are recovered from the trust account." Can't tie this in with my figs, but it makes my other estimates conservative to say the least. Anyway, I took Apr 129 and Sep 230 and took an average of the two X 6 months = 1077 for H1. We are told in Feb that Oct-Dec was 830 IVA's and in Apr that Jan was 344 and Mar 554. That leaves Feb alone which I took as 449 (midway). But let's say it was only 195. That makes 3,000 for FY X 2,265 = 6,795,000 revenue. Leaving margin slightly worse at 60% less admin costgs inflated by another 250k for the new staff and building of 1,750,000 and a 30% tax rate leaves net profits after tax of 1,628,900. EPS = 6.62 - 258% growth over 1.85 for 2004/5. PE = 53. PEG = 0.21. Margin = 34% and ROCE = 46% on year end capital (allowing a large part of creditors as interest bearing capital just to be safe).

For 2006/7, let's limit growth to just doubling = 6,000 IVA's at 2,265 = 13,590,000 at the same margin (although we are told more than once they are improving) and a hefty increase in admin expenses to 3.25m, after tax at 30% leaves a net profit of 3,432,800. EPS = 13.95. Growth = 111%. PE = 25. PEG = 0.23. Margin = 36%. ROCE (v. average capital for year) = 65%.

With no urgent need to invest any capital in acquiring quite possibly earnings dilutive appendages, and a reasonable cover of, say, 3.5 tims, we could see dividends of about 1.89p for 2005/6 and 3.98p for 2006/7 - a very respectable yield for a rampant (ramped - lol!) growth share which has the advantage of allowing institutions to buy in to support/re-rate the SP. Where will the SP go? Could be 3 times over 5 years, or 5 times over 3 - who knows, but it should be good whilst such effortless earnings growth into a rapidly growing market continues.

So on much more conservative assumptions (don't forget, there is no debt whatsoever to speak of since share placing and strong operating cashflow, maybe a couple of HP leases) I still get a massive buy which is what I did this morning, staking my "even-weight" 5% of my funds for openers. It's funny how you can only really get to know a share if you're in it. Why is that?

BTW - DFD claim a steady 20%of a growing market, whereas DEBT claim 7% has grown to 12% - so you are right on that basis that DEBT will grow faster from here. I think they are in almost exactly the same price strate of the market, whereas CLEA are looking at much smaller clients and per transaction fees and will thus have to work that much harder to make so much money - why go there when there are two clear leaders with plenty of scope left.

Sorry for another numerical ramble, but I love these simple-to-understand businesses with transparent P/L and B/S and great numbers - DGT, ASC, GME, COH - also watching HMS as a twin to GME which looks v. interesting too.

sd

sd: That is really excellent. You have surpassed yourself, even though you were sitting on the Thames Barrier - I thought you were a dog, not a bird! Hadn't picked up the Trust Fund bit, but it explains how they can take the profit on an IVA at completion; nice idea.

I'll just wander through your numbers: (a) your figures for H1 tie up with interim revenue so it looks as though the placing document was optimistic: I'm surprised it is as high as 2,265 per client although they might justify charges of 20% or so; (b) Your 2005/6 figures may be somewhat pessimistic though none the worse for that: Feb is certainly low; why should admin expenses rise unless they land us with staff bonuses as for DGT; (c) tax is 10% at half-time so it seems likely that they have allowances to bring forward. Still, lets say the pe is 50. Two questions then to ask. First, what are likely figures for 2006/7. It seems clear that the market is still in its early stages and that it should double in the year. In that case,it does seem likely that DEBT will still grow ahead of the market. A projected pe of 20 would correspond to a market share growing to 14% or so.

The second question is what the likely effect of figures like yours is on the sp in June when known. I think it would be quite cautious to assume a projected pe of 30 and this means a 50% uplift on current price, lets say to 5. I am assuming that analysts will be able to re-calculate 2006/7 as you have done.

Finally, I think we need to rephrase 'one man and his dog' to 'one dog and his man': lucky to sit at the feet of such a demi-DOG.

Eric

Don't forget the Barrier is pretty much oppposite the Isle of Dogs - hence my inspiration.

b) admin expenses rising because they have doubled the staff and taken on 15,000 sq ft new premises as from beginning April.

c) tax may have been 10% at half way stage, due to low profit and capital allowances, but no losses to bring forward. At level of profit I predict they will be exposed to the full 30% and timing differences on capital allowances will not be material.

Wish I'd paid attention to this at 175p when the Feb trading update was available and most of my numbers could have been extrapolated from there - ah well, learning all the time.

sd

OK. Your estimates should be a boost to sp anyway. Feel the same way because my interest was increasing following Shares write-ups, certainly in DFD a DEBT had appeared on my radar. But it was essentially the recent post-close statement that convinced me plus Shares comments that analysts projections would be exceeded. Don't the dogs eat the scraps from under the rich man's table anyway?

Eric

You rich man, me dog. Thank you for the scraps! Should have mentioned this before.

sd

Eric

Re question a) your post 15 above. I think I read somewhere that they only take on case where debt exceeds 15,000. So 2,265 is only 15% max of the deal value - quite modest compared to what liquidators take. I assume like liquidators it comes up front, but unlike them it is paid by the creditors, not the debtor in the first instance.

Anyway 5% down today - must have seen me coming as usual.

sd

sd: As I understand it, the IVA is managed by the Insolvency firm over a five year period. The leading firms seem to have an entry point of 15K but one of the advertisers on CEEFAX says 5000. The client needs to put in 30% min. of the debt part of which goes to the advisor. Interested in DEBT's reference to a Trust Fund. It may be that this enables them to take credit up-front; but then who bears the cost of administering the scheme: most should be straight-froward as each will have its own bank account, but there will be annual reviews and revisions if circumstances change. Doing a search on Debtmatters throws up plenty of competition using the term 'debtmatters' as an advertising slogan so there are probably unscrupulous operators in the market. However, it is clearly best to use an established practitioner as they will have established rules with the creditors who will normally be represented anyway by a leading accountancy firm. I draw the conclusion that success breeds success so it will not be that easy for a new provider to enter the market. Suspect there should be a run-up to the June results with a profit-taking opportunity then (before or after depends on the figures which I suspect will be ahead of market expectations, based on sd's calculations).

Eric

sd: Have a look at the Note from DFD this morning. DEBT up in sympathy (should that be empathy?). Significant that market is up overall by 130% in first quarter. Obviously this is bringing in competition, e.g. from the banks - even though they are a major part of the problem! lol! How do these figures effect your calculations? I expect that current year's figires will need to be raised. DEBT report before DFD so should start a further run up to the results, which I think are 10th June.

Eric

A first look shows that DFD's view of the market and their share (20%+) of it fits roughly with DEBT's respective view and share (12%+). DEBT is growing faster than DFD rising from 7 to 12% over the last year compared to DFD's 18 to 21% market share.

Looking at Operating Margin, Return on Capital, PE and PEG from Digital Look for DFD and my own calcs fo DEBT, they are very level pegging (can't be sure if we've used the same basis of calculation). DFD has a lower 2006 PE (47 v. 53) but level pegging for 2007 (25 each), but DEBT has a lower PEG (because it is growing EPS faster) and is therefore better value. DEBT's margin seems higher as does its return on capital - again better value. Growth alone is not the crictical parameter, value is. All of which seems to suggest your inital appraisal that DEBT had further left to grow from a lower base is right. Maybe being last in a bog is good for DEBT since DFD have paved the way (at some cost?).

Received a great little email recently about the difference between growth and value using IBM and Exxon as examples.

ANNUAL GROWTH RATES, 1950-2003
IBM Exxon Advantage
Revenue per Share 12.19% 8.04% IBM
Dividends per Share 9.19% 7.11% IBM
Earnings per Share 10.94% 7.47% IBM
Sector Growth 14.65% -14.22% IBM

AVERAGE VALUATION MEASURES, 1950-2003
IBM Exxon Advantage
Average P/E 26.76 12.97 Exxon
Ave. Dividend Yield 2.18% 5.19% Exxon

Dividends are a critical factor. Those who bought
Exxon's stock and reinvested the oil companys dividends
accumulated almost 15 times the number of shares they
started out with. Investors in IBM who reinvested their
dividends got only three times their original
shareholding.

Yes, both stocks have done well. But investors in
ExxonMobile earned 14.42% per year on their shares from
1950-2003. That's more than half a percentage point
ahead of IBMs 13.83% annual return. So although the
difference is small, $1,000 invested in the US oil giant
would be worth over $1,260,000 today. If you put $1,000
into IBM, you would have $961,000...some 24% less.

In the short term DEBT will grow faster and its SP may rise faster. But over the longer term who ever pays the best dividends will also be a crucial factor.

If I had the money to allocate enought to both shares I'd be laughing - come to think of it I did, but sold DFD far too early. Hopefully won't do that again in a hurry.

sd

Thanks, sd, for prompt and thorough reply - deserve extra bone and walkies. Both shares are still an excellent investment given the growth of the market and growth of there relative shares. Clearly this sort of growth rate won't last for that long although the total market must be pretty large. It appears that the banks are trying to jump on the bandwagon; the cost of entry must be quite low; you wonder how the lenders will react in the medium term as the cumulative cost of IVAs must be pretty high. I'll see how the sp of DEBT moves through June before deciding whether to hold longer term.

Interesting analysis of IBM and Exxon; I woner how HSBC or Tesco would compare. I did have some 1500 of IBM shares purchased at a discount as an IBM employee around 1961: talk about DFD but its those who buy young and tuck away who are the biggest winners. Still trying to make up for lost time - yes, and that costly wife!

Eric

sd I wonder how you rate the relative capitalisation of DEBT and DFD. If I have the up-to-date figures, DFD is capitalised at about 163m (37m shares @ 440p) whereas DEBT is cap'd at 83m (24.6m shares at 340p). There certainly should be a differential but surely not 2:1; perhaps 3:2 is better. Picture should resolve after respective results in June. Nominal price should be about the same given ratio of shares in issue is 3:2.

Eric

the respective caps are relative to EPS which relationship is reflected in the PE. as noted above this is pretty much level pegging prospectively, so the cap differential is about right with DEBT likely to grow faster than DFD.

sd: thanks again. How do you see ACG in comparison? Growth appears even quicker than DEBT. One advantage for ACG is that they seem to have a wider range of offerings whereas DEBT appear to concentrate on IVAs. Thus they will attract people who just want their debt managed better than they can do themselves. Whereas DEBT appear to take credit up front with a Trust Fund invovled, ACG have a forward flow of payments. Do you agree this analysis? cap somewhat lower although recent rise even stronger than DFD and DEBT.

Eric

eric - difficult to tell at first glance from first profitable interims compared to full year for DFD and DEBT. However, it seems their PE, margins and ROCE are not as favourable as DEBT, although they seem to have the same markjet share (12%). They could be growing even faster than DEBT - difficult to tell from a loss-making 2005 year to a first profitable year. Full year revenues could be 11.4m up 300% on 2005.

Their different business model - more services than just IVA's and referral as a means of acquiring clients instead of just advertising - is not so easy tom compare without a full set of accounts to go on. I suspect their other activities are much lower margined than IVA business whcih they claim is 60% gross margin. However their overall gross margin is only 35% H1 2006.

Their chart shows an interesting comparison between all three. Starting at 0% 1 year ago, DFD ends up at 200%, ACG at 300% and DEBT at 550%. So DEBT clearly has the greatest momentum and relative strength. By contrast AIM-allshare index ends at 30% and General Financial sector at about 80%. Over 2 years the respective figures are 180%, 180%, 370%, 10% and 60% - again DEBT the outright winner.

I remain happy with DEBT especially as it regained my purchase price after a somewhat sulky performance immedaitely after I bought!

sd

This sector particularly hard hit in market fall-out, presumably because of previous increases and therefore nuimber of investors who want to pocket their profits. Will have to consider reducing my holding if market doesn't recover tomorrow - I suspect many are in same position, partic ularly those who utilise derivatives.

Eric

One word of caution ,these are a high beta stock and since i bought them in August they have been volatile, when the market dropped they seemed to drop like a stone,and when it turned they went up in leaps and bounds ,I sold a good part of my holding recently so am not too bothered ,however i wouldn't be surprised to see them bounce right back.
I don't think this sector was hit any harder than other shares i am in or watching ,most took a battering today,,here.s for a quick recovery.

Eric - it's not the sector which fell 4-5% today, it's DEBT which fell 8% - don't know why it's more volatile - maybe it has fewer insti's holding and more PI's/daytraders. Hope jimmyb's right about beta working both ways!

sd

In fact later trading was positive so this seems to bear out your comments, jimmy and sd. Volume not that big so seems like part of a general mark-down.

Eric

In my opinion this got off lightly today ,i expected to see it down a lot more than 1p ..