FTSE 100 doorstep lender Provident Financial (PFG) has suffered one of the worse days trading for some time, losing 70% of its value as its shares collapse to 536p.
But investment bank JP Morgan Cavenove is convinced you can make money by owning the shares.
It has a £32 price target on the stock, implying nearly 500% upside.
We now explore the reasons why JP Morgan is bullish when the broader market is racing to get rid of the shares.
Changes to its home lending business have not gone well and today we’ve learnt the situation is worse than many predicted.
The business is now running with sales £9m a week lower than in 2016 while collections are at 57% compared to 90% the prior year.
This bombshell has cost chief executive Peter Crook his job. Along with the home credit horror show, it turns out financial regulator the FCA is investigating Provident’s banking division Vanquis over its Repayment Option Plan.
This is a way for borrowers to freeze their account for up to two years for a 1.29% monthly fee. It contributes £70m annual gross revenue to Provident, according to JP Morgan.
Today’s news will be frustrating to investors as the company says its Vanquis, Moneybarn and Satsuma businesses are all trading in line with expectations.
Management is guiding towards a loss in the home credit business of between £80m and £120m versus previous £60m profit guidance.
The interim dividend has been cancelled and it looks highly unlikely that the full year dividend will be paid, judging by comments from the company.
In light of these negative points, why is JP Morgan analyst Gurjit Kambo remarkably upbeat about Provident?
He believes the home credit business has been ‘successfully repositioned which, in our view, offers a predictable, high-return profit (and cash) stream’, according to a research note published today.
He also predicts 10% earnings per share growth over the next three years, with an attractive dividend yield. That latter point seems odd given the dividend warning in today’s trading update.
‘The key risk to the business remains weak consumer confidence and so a lack of desire to borrow on the part of customers,’ says the analyst.
‘There is also the risk that adverse economic conditions result in increases in the impairment rate, although, equally, this may surprise positively if economic conditions improve. At Vanquis, we have regularly underestimated the pace of loan book growth, and we continue to see risk that our assumptions will prove conservative,’ he adds.
Using Kambo’s estimates, Provident is trading on a 2017 forecast price to earnings ratio of just 3.5-times but with an extremely generous dividend yield of 25%. It’s either a bargain or there’s something rotten in the state of Provident.
Kambo could not be reached for comment at time of writing.
