The latest update from Provident Financial (PFG) suggests the company may have turned a corner and is on the way to recovery.
The market was buoyed by the statement with the company’s share price gaining 8.2% to 694.8p, although let’s put that in some context.
On 22 August last year, Provident’s share price collapsed by 70% as the restructuring of its home credit business was a disaster.
Today’s statement says the home credit recovery plan is ‘on-track’ although the number of active clients was down to 491,000 from December’s 527,000.
It puts this result down to ‘typical seasonal reduction’ and its overall home credit collection performance was 70% versus 78% the prior quarter for the same reason.
CAN PROVIDENT KEEP IT UP?
Management says it expects the home credit business too break even by the second quarter of 2018 and move into profit by 2019.
Recently, Shares spoke to Rupert Rucker, head of income solutions at Schroders (SDRC) who has invested in Provident for his company’s Income Maximiser (GB00B0HWJ904) fund.
Rucker believes that as long as a company has a robust balance sheet and he thinks they’ll recover, he’ll buy them.
Provident’s other subsidiaries, car financing business Moneybarn, unsecured lender Satsuma and bank Vanquis are also on the up.
Moneybarn has seen a 10% growth in new customers on a year-on-year basis although impairments have also increased, albeit modestly.
Satsuma customers grew by 50% to 91,000 by 31 March and due to a tightening of underwriting standards, impairments were lower.
Even Vanquish, under scrutiny from the Financial Conduct Authority, has had a strong start to the year. Its profits are ahead of the company’s expectations and customer numbers are 7.8% higher than last year at 1.7m.
ANALYST VIEW
Shailesh Raikundlia, analyst at Panmure Gordon, says ‘having resolved solvency, funding and regulatory concerns via the £330m rights issue and FCA settlement in February we believe the market should begin to refocus on the high returns potential of Provident available at an attractive margin’.
Using Raikundlia’s forecasts, Provident is trading on 12.3-times 2018’s earnings although the company has some way to go before it can start paying a decent dividend.
Raikundlia forecasts 52.2p per share dividend for 2019, implying a 7.7% yield.
After the rights issue completed on 10 April, Provident had a common equity tier one ratio of 29.8% versus the minimum requirement of 25.5% for this risky sector. This equates to around £120m surplus which could be returned to shareholders.
However, this is the exact figure which Provident lost in 2017 and its fine over Vanquish’s ROP product discussed here put further financial strain on the company.
It will clearly take time before the company can return to its high dividend paying days.
