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Provident Financial plc’s problems are a huge opportunity for this growth stock

In the highly lucrative world of subprime lending Provident Financial (LSE: PFG) is essentially the 800-lb gorilla in the room as it controls around 60% of its core doorstep lending market. But its transition from self-employed agents to full-time employees has gone to muck, causing a severe profit warning and opening the door for smaller competitors to gain necessary market share and scale as it scrambles to stabilise trading.

And diversified subprime lender Non-Standard Finance (LSE: NSF) is also taking its opportunity by accelerating growth in the doorstep lending division by hiring more agents at a rapid clip. Indeed in H1 results released this morning, the company’s management went out of its way to say: “The restructuring of a major competitor has presented us with a significant opportunity to grow.” No prizes for guessing who that competitor is…

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On top of growing its doorstep lending business, which is already the third largest in the UK, the company’s secured loan- and branch-based lending divisions also grew nicely during the six months to June. All together, underlying revenue rose 16% year-on-year (y/y) to £52m and underlying pre-tax profits jumped 26% to £5.4m. The relatively young company is still loss-making at a statutory level due to expansion but these losses are narrowing as the benefits of increased scale roll in.

In addition to this very good set of interim results the company also announced the £53m acquisition of guaranteed loan provider George Banco that will make NSF the clear number two player in this market. The acquisition will be earnings accretive in 2018, which isn’t surprising as George Blanco recorded £9.3m in revenue and £4.1m in EBITDA over the past year.

NSF has been given what could be a once-in-a-lifetime opportunity to gain and hold market share at the expense of Provident. So far it appears management is taking advantage of this which, together with growth in its other business lines, rising dividend payments, and an attractive valuation of 13.6 times forward earnings, makes it worth taking a closer look at.

A safer option 

A more established growth stock that’s caught my eye is speciality chemical producer Sythomer (LSE: SYNT). The company works closely with clients to design everything from synthetic rubber for medical gloves to binding for magazines and has grown at a respectable clip in recent years through organic expansion and small acquisitions.

In 2016, this twin-pronged growth strategy led to sales rising 10.8% y/y, in constant currency terms, and a full 20.2% at actual exchange rates. This boost from the weak pound could be a one-off, but the growth of the underlying business through very good trading in Europe and Asia should be welcomed.

Aside from diversified revenue streams and geographic markets, I’m also attracted to Synthomer’s solid profitability. Last year’s operating profits of £130.2m represent margins of 12.4% that were impressively resilient given rising raw material prices in Europe.

With a good business model of exploiting its expertise in niche sectors, high growth potential, and a reasonable valuation of 16.8 times forward earnings, Synthomer is certainly one company I’ll continue following closely.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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