Embattled doorstep lender Provident Financial (PFG) rallies 70.4% to £10.02 as it announces a settlement has been reached with the Financial Conduct Authority (FCA).
The company is raising £331m through a rights issue, well below the £500m that was predicted to be needed to cover the FCA bill and rebuild its capital base.
Provident Financial looks to have drawn a line under its 2017 annus horribilis which included crashing out of the FTSE 100, two profit warnings and FCA probes into two of its divisions, Vanquish Bank and Moneybarn.
From the cash raised in the rights issue, the Vanquish division will pay around £170m in compensation for its customers as well as a £2m fine to the FCA itself.
The compensation is for not informing customers of the true cost of its Repayment Option Plan (ROP), an add-on product. This allowed Vanquish credit card users to freeze their account for up to two years, without incurring any interest, or take a payment holiday once a year.
In addition, Provident Financial has set aside £20m to deal with management’s ‘expected outcome’ of the FCA’s investigation into the company’s car finance division Moneybarn. While this may be far lower than the cost for compensating those sold the ROP product, Moneybarn made £34m in underlying pre-tax profit in 2017, so is a sizeable chunk in this context.
According to Gary Greenwood, analyst at broker Shore Capital, the fines and compensation are ‘far less than we feared’. More good news for investors comes with the resumption of dividend payments for 2018 after the shareholder reward was suspended in 2017.
The results
While 2017 was widely expected to be a disaster for Provident, in some cases the 137-year-old Bradford-based company surprised on the upside. Its adjusted pre-tax profits were down 67% on a year-on-year basis at £109.1m, but this beat the consensus forecast of £108.7m.
Similarly, adjusted earnings per share fell by 65% to 62.5p, better than the consensus estimate of 49p.
The group’s consumer credit business reported a loss of £118.1m as Provident had previously warned. This breaks down to around a £114m loss for its home credit business or door step lending and a £5m loss for its payday loan business Satsuma. For 2016, the division reported a pre-tax profit of £115.2m so this represents a stark reversal in fortunes.
However Moneybarn’s reported pre-tax profits of £34.1m came in near consensus forecasts of £34.6m.
Going forward
Provident Financial sounds bullish in its outlook statement saying that as the regulatory and capital uncertainties are now resolved, the rights issue provides ‘a strong capital base and access to the funding that will allow the group's businesses to develop their market-leading positions’.
According to Shore Capital’s Greenwood, this translates to a 2018 31 December year end pre-tax profit of £181m and adjusted earnings per share of 90.1p, although he isn't forecasting a dividend.
However, Provident insists that it will pay a ‘nominal’ dividend for 2018 and says for 2019 it will adopt a progressive dividend model with the payout being covered at least 1.4-times.
Provident says that each of its businesses have ‘ performed well through the early weeks of the year’. After a crushing 2017, the company seems to be on the road to recovery.
Leaderless for some time, its new chief executive Malcolm Le May, who took the reins permanently on 1 February, says 'the group's turnaround is making progress, but the board and I realise there is still much to do to achieve a customer centric business delivering long-term sustainable returns to our shareholders.'
