Provident Financial (LSE: PFG) shares took a beating in 2017, losing around two-thirds of their value and year-to-date shares in the doorstep lender have slumped by a fifth thanks to yet more bad news. But could it turn into a goose that laid a golden egg this year?
Last week, Provident warned that 2017 losses at its Home Credit division would be around £120m, which is at the top end of previous guidance. In the same release, management noted that the company is in talks with the Financial Conduct Authority “with a view to reaching a resolution of the regulatory investigations” Britan’s financial services regulator is currently conducting.
The bad news is mounting
The FCA is investigating Provident’s credit card and car financing divisions, which it believes have fudged customer affordability assessments. As of yet, there’s no telling how much this could cost the group, but City analysts are speculating that the total bill could be as much as £300m.
Such a hefty provision for fines and customer redress could be a problem for Provident. By the end of 2017, the firm had cash of £34m and a debt facility of £66m giving total liquidity of around £100m.
Still, even though the company’s resources are tight, it’s unlikely it will go the way of Carillion. Most analysts are expecting the firm to conduct a rights issue to bolster its balance sheet and draw a line under all its troubles. With a market capitalisation of £1bn at time of writing, a £300m rights issue would be disappointing for investors, but it would not be a disaster.
Is there any good news?
It’s not all bad news, however. Provident is making some progress in improving debt collection rates from its customers. According to last week’s trading statement, collections performance in December of 78% was up from 65% in September and 57% in August, although it’s still below the 90% once achieved.
Nevertheless, customer numbers are growing. Home credit customer numbers ended the year at approximately 530,000, up from around 500,000 in September, with home credit receivables of £350m at the end of December, up from £316m in September. Meanwhile, the group’s payday lending business Satsuma reported 40% growth in new business volumes during the fourth quarter.
The group’s Vanquis Bank was hurt by the loss of its Argos partnership, but overall for the year, new customer bookings were 437,000, up from 406,000 in 2016. And lastly, Moneybarn, Provident’s car finance arm, reported growth in customer numbers and receivables for the year of 22% and 26% respectively.
Looking at these growth numbers, it’s clear that the underlying business is heading the right direction, albeit slowly. It all depends on how severe the fine is from the FCA and when the group has to pay it. If there’s no fine until the second half of the year, this will give the firm time to rebuild its cash reserves and get back on a stable footing, which may mean that there’s no need for a rights issue.
Assuming nothing more goes wrong, City analysts believe that the company can generate earnings per share of around 96p for 2018, a multiple of 17.2 times earnings (five-year average) gives a possible share price of 1,651p, 136% above current levels. For 2019, analysts are forecasting earnings of 137p per share, giving a price target of 2,356p, for a gain of 237% above current levels. Not a golden egg, but definitely an improvement.
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