Shares of FTSE 100 sub-prime lender Provident Financial (LSE: PFG) fell by more than 16% when markets opened on Wednesday. The slump was triggered by a profit warning in which the firm said that profits from its consumer credit division are expected to fall by 48% to £60m this year.
This stock has been a steady performer in recent years and has become one of Neil Woodford’s top holdings. At the end of May, it was the third-largest holding in Woodford’s Income Focus Fund and the fourth-largest in the fund manager’s flagship Equity Income Fund. So what’s gone wrong?
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Provident is in the process of switching its doorstep lending organisation from using self-employed collecting agents to a smaller number of employed “Customer Experience Managers”. This change seems to be causing more disruption than expected.
The company says that the restructuring has caused a £40m shortfall in loan collections and resulted in new lending levels £37m lower than during the same period last year. Vacancy levels among the collection workforce have been running at 12%, twice the expected rate.
The new organisation will take effect in July, when operating performance is expected to improve. But the shortfall in collections and lending will take time to make up. Management now expects the consumer credit division to generate a profit of £60m this year, down from £115m last year.
This is disappointing, especially as on 12 May, the company said that the impact would only be “up to £10m for 2017”. However, the group reported a net profit of £262.9m last year, so a one-off shortfall of £55m should be manageable.
Should you sell?
This workforce reorganisation appears to have been badly planned or perhaps poorly executed. But this should be a fixable problem. As far as we know, it shouldn’t affect the company’s medium-term performance.
Provident’s management has performed well in recent years, delivering average earnings per share and dividend growth of 15% since 2011. With the stock trading on a forecast P/E of 13.3 and with a prospective yield of almost 6%, I would hold on after today’s news.
A top Woodford small-cap
Neil Woodford appears to be keen on the sub-prime credit sector. His fund participated in the IPO of doorstep lender Non-Standard Finance (LSE: NSF) in 2015 and the stock remains a significant holding in both of his income funds.
Although it’s a new arrival on the stock market, this company was founded in 1938. The firm remains a fan of using self-employed collection agents and has said it has no intention of copying its larger rival Provident in switching to employed staff.
For investors, Non-Standard Finance presents an interesting income opportunity. Following a number of acquisitions, normalised revenue rose from £14.7m to £81.1m last year, while normalised operating profit rose to £13.8m. Further growth is expected this year and the company plans to start paying out 50% of normalised earnings per share. This gives the stock a forecast yield of 3.5%, rising to 5% in 2018.
Buying at current levels could lock in an attractive long-term income stream. For investors who are happy to invest in this sector, Non-Standard Finance may be worth a closer look.