Lowell - More litigation, less shorts
All,
We have not been rolling forward our model since the refinancing and the call this morning was predictably boring.
What stands out is the reversion of some £50m of UK book write-offs taken in H1 last year on the basis that delinquent payment behaviour is largely unchanged. This is due to continued government support schemes to which some 90% of UK portfolio clients have access. Meanwhile, the nordic portfolio exhibits stable performance.
No write-offs for 2021:
More interestingly, the company expects to make no extraordinary write-offs this year either. Our theory had been that Lowell somewhat owes the market a write-off on its UK portfolio, which would bring it in line with what we have seen with other market players. Naturally, that will depend on continued government programs following the Covid-19 crisis, but we agree with management that these programs are politically sticky and are unlikely to end abruptly.
Profitability:
As we have previously argued, we think of EBITDA (not Cash EBITDA) as a reasonable medium-term approximation of profitability of the operations - even if that measure can be far removed from cashflows. Q4 EBITDA has still been significantly lagging historical performance, which should be partially explained by resuming litigation expenses in the UK, which should begin to yield profits in H221. But it may also be a sign that the company is running less efficiently - either due to work-from-home processes or because delinquents do find it harder to pay or perhaps because performance might have been "window-dressed” (see previous posts) into the refinancing.
Positioning:
We had been thinking about taking targeted short positions around Lowell's reporting calendar this year to capture any late write-downs of the book. The strong effect of continued government support programs, however, has put an end to that strategy.
Wolfgang
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E: wfelix@sarria.co.uk
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