Shares in Eastern Europe-focused sub-prime lender International Personal Finance (LSE: IPF) crashed by as much as 15% in early deals this morning after the company announced that changes to the Polish corporate tax regime would cost it around “£12m to £14m in 2016.“
According to the enterprise, the main impact of the tax legislation changes “would be an increase in tax payable arising from disallowance of tax deductions for expenses linked to certain intra-group transactions.” Using this tactic has been a lucrative tax shield for the group, considering the sizeable expected costs for 2016. What’s more, the changes will cost the firm a “one-time accounting charge in 2017 of up to £30m arising from the write-down of a deferred tax asset.”
I believe that this tax law change is a game-changing development for IPF. To put the expected costs into some perspective, for the first half of 2017 the company reported a net profit of £22.4m. Assuming a charge of £6m a half — at the low end of management’s expectations — full-year net profit could now fall 38% if the policy makes it into law.
Multiple problems
The Polish tax law change is just the latest in what has a been a never-ending stream of bad news for IPF. Over the past five years, the company has struggled to grow as policymakers have clamped down on doorstep lending and consumers have defaulted. As a result, costs are rising and so are loan impairments.
At the beginning of March, the firm reported a fall in customer numbers and a decline in pre-tax profit for 2016, to £92.6m from £116.1m the year before. Customer numbers fell 2% to 2.5m from 2.6m in 2015, impairments were 26.8%, compared to 2015’s figure of 25.6% and IPF reported a cost-to-income ratio of 43.6% in 2016 versus 41.2% in 2015.
And if the Polish corporate tax bill goes through, it looks as if IPF is going to struggle even more. City analysts had been expecting the company to report a net profit of £75m for 2018 and earnings per share of 32.3p. According to my figures, if the tax changes come into force, the company will earn 27p per share in 2018.
Undervalued
Even though IPF’s earnings are set to slump in 2018 in the worst case, at 188p they look undervalued. Indeed, based on my earnings estimate above, the shares are now trading at a 2018 P/E of 7, almost bargain territory.
That being said, I should point out that these figures are only estimates, both on my part and from the company. The final changes and earnings figures could be much worse, or even better.
The bottom line
IPF has had to grapple with plenty of problems over the past few years, but the company has soldiered on, and after today’s slump, shares in the lender look cheap compared to estimated forward earnings. Overall, this might be a turnaround situation worth buying-into for the risk-tolerant investor.
