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MARKET COMMENT
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Debts carried by the British public have ballooned over recent years and now total nearly £1 trillion. Although profiting from the borrowing bubble might seem offensive, attractive investment opportunities exist at the lower end of the credit specturm. Provident Financial (LSE: PFG), founded in 1880 by the philanthropist Sir Joshua Waddilove, is one of Britain's biggest doorstep lenders. It specialises in lending small amounts, typically £150 to £500, over a period of six months to a year. Repayments are collected by agents, which number almost 12,000 in the UK alone. The company also has operations in the Czech Republic, Poland, Hungary and Slovakia, which together employ more than 13,000 doorstep collectors. Provident Financial also sells car insurance, through which it usually commands higher-than-average margins. Additionally, the company owns Yes Car Credit, which is one of Britain's leading motor finance companies for consumers with blemished credit records. Provident Financial is expected to post a profit of £212m this year, a rise of 2% over 2003. Profits next year could rise to £222m, representing earnings per share of 61p. That would put the business on a valuation of nine times forward earnings at the current share price of 571p. Its prospective dividend yield is over 6%. Other players in the sub-prime lending market include Cattles (LSE: CTT) and S&U (LSE: SUS). Cattle's shares trade at 303p, which values the business at nine times 2005 earnings. Those shares currently yield 4.9%. S&U, at 495p, is also valued at nine times forward earnings. But its dividend yield is a more attractive 6.2%. Albemarle & Bond (LSE: ABM), whose main activity is pawnbroking, also provides cheque-cashing services. The 53-branch company launched an unsecured loans business in 2003, which has now been rolled out nationwide. Profits this year are expected to rise 20% to £5.4m, with another 11% improvement pencilled in for 2005. At 93p, Albemarle & Bond is valued at 10.5 times forward earnings, which does not look too demanding for a growing business. Recently floated Debt Free Direct (LSE: DFD) is a provider of debt-reduction solutions. The company reckons the market for its debt consolidation service is set to expand as interest rates continue to rise. Results published earlier this month saw Debt Free Direct report a full-year profit of £0.06m on turnover that quadrupled to £4.2m. Profits in 2005 are expected to come in at £1.2m, valuing the business at 33 times forward earnings. It is easy to be churlish about companies that prey on the vulnerable by charging what are normally considered exorbitant rates of interests. However, it is worth bearing in mind that these companies are willing to take on high-risk borrowers that most established high street lenders are unprepared even to talk to!