Provident Financial

Description

UK financial services business, offering sub-prime finance to its customers. Its core home collected credit business has been extending short-term loans within local communities for more than a century. In recent years, it has successfully developed other brands, such as Vanquis Bank (credit cards), Moneybarn (vehicle finance) and Satsuma (online loans).

In 2017, the company’s transition of its home credit business from a self-employed agent model to one in which lending is conducted by full-time employees, was executed poorly, resulting in a substantial drop in collection rates and in new business. Meanwhile, the company also announced that its regulator was investigating one of Vanquis’ products. Although this regulatory matter has now been dealt with and trading at its other divisions has continued in line with expectations, these issues have represented a significant operational setback from which the business is still recovering.

Investment case summary

The profit warnings from Provident Financial last year had a material impact on its share price. We had expected its management team, who we knew well and who had built an excellent operational track record over a very long period of time, to successfully execute the changes to its home credit division’s operating model. With the benefit of hindsight, this was a misjudgement.

Although this has represented a disappointing situation, as is nearly always the case in the face of bad news, the stock market has reacted in a disproportionate way. As a result, we have maintained our exposure to the business within the portfolios, determined to remain disciplined in our fundamentally-based investment approach.

From our perspective, on the basis of everything we were able to know about the business, Provident Financial’s shares were undervalued before the profit warning and became even more profoundly so after it. There has been change in leadership – some of it inevitable, some of it very unfortunate – but our relationship with the business remains positive and supportive. In our view, the business is now on a stable recovery path and it retains many of the qualities that initially attracted us to it. Fundamentally, it remains a high-quality business which is competitively well-positioned in its markets. The successful resolution of regulatory matters has allowed these qualities to become more apparent but we continue to believe that the company’s intrinsic value is substantially higher than the current share price would suggest.

Ask a question about our investment in Provident Financial

Fund exposure
Income Focus Fund 5.23%
Equity Income Fund 4.91%

As at 30 November 2018

Segmentation
Geography United Kingdom
Industry Financials
Themes UK domestic exposure

Source: Woodford

Share Price

Market Quotes by TradingView

Commentary

Sound progress

Provident Financial has this morning issued a trading statement, which confirms the group continues to make sound progress.

Within its Home Collected Credit division, the recovery plan introduced following last year’s operational challenges is now substantially complete. The company continues to wait for full authorisation from the FCA, which will allow it to introduce performance-related pay for its customer experience managers. In the meantime, the collections performance has remained around 10% lower than historical performance, but this should improve following receipt of full authorisation. The collections performance of credit originated since Q4 2017, where customer relationships are much stronger, has consistently been in line with historic levels.

Elsewhere, volumes and credit quality at Vanquis remain in line with management expectations. The Repayment Option Plan (ROP) refunding program which follows last year’s FCA investigation, is progressing well and should be completed in early 2019. Meanwhile, Satsuma and Moneybarn continue to deliver strong growth.

At the group level, Provident Financial is well-capitalised, with a common equity Tier 1 ratio above 30%, well ahead of its revised minimum capital requirements. It continues to expect to pay a nominal dividend for the current financial year, before moving to 1.4x dividend cover next year. At the prevailing price, the shares trade on 9x 2019 forecast earnings, a year in which the yield should be just shy of 8%. We continue to believe that the company’s intrinsic value is substantially higher than the current share price would suggest.

Stephen Lamacraft
19 October 2018

Interim results

An encouraging set of interim results, which were a bit better than consensus estimates and, we would argue, a lot better than the market was anticipating. Within the divisions, Vanquis and Moneybarn continue to perform strongly. In Vanquis, restitution on its Repayment Option Plan (ROP) product, which was the subject of an FCA investigation last year, is well underway and the business has not seen a surge in complaints (although they still hold a provision for this). Additionally, new customer additions at Vanquis are gaining momentum after a tightening of underwriting standards last year. Moneybarn is growing well, with a competitor withdrawal enabling strong lending growth even against a backdrop of tighter internal underwriting standards.

Slightly disappointingly, the operational recovery plan in Home Credit has lagged slightly behind plan. Its overall collections performance has not improved in the second quarter, partly because its agents are not currently incentivised to collect against the legacy loan book. This shows up in a difference between the collection rate on loans that were live during last year’s changes to the operating model, and the collection rate on newly originated credit, which is performing in line with the business plan. However, the company is due to introduce a mix of variable compensation, workforce flexibility and managerial oversight into the agent workforce, which should improve collection performance in 2019. Moreover, full FCA authorisation, which Provident Financial expects to receive by the end of this year, should improve this situation and the company remains confident that the collections recovery will be complete by Spring 2019, and that the Home Credit division will be profitable again next year.

A restatement of the accounts was required due to IFRS-9 changes, which require a greater level of up-front provisioning on newly extended credit. This results in a bigger profit headwind for businesses that are growing (such as, within the Provident Financial stable, Vanquis and Moneybarn) but, importantly, it does not affect cash flow. Meanwhile, the board has been strengthened with the appointment of a new Chairman, Patrick Snowball and three new non-executive directors.

Overall, these results and the subsequent meeting we have had with management, help to paint a picture of a business in increasingly good shape. Each set of results should be seen as another step in rebuilding the market’s confidence in the business and its share price.

Alex Correia
31 July 2018

Encouraging trading

An encouraging first quarter trading update from Provident Financial this morning, with all divisions performing broadly as expected. Vanquis Bank has delivered profits ahead of plan as a result of robust margins and operational leverage. The recovery plan in Home Collected Credit is on track, with a good collections performance delivered. Moneybarn has delivered strong new business volumes and, although impairments have tracked modestly above expectations, delinquency trends are now improving.

Overall, a good update with continued signs that the rehabilitation of the business is well underway. We can expect the dividend to be reinstated soon, at a nominal level initially, with a progressive dividend policy in line with dividend cover of 1.4x from 2019, which at the current share price, equates to an attractive yield of more than 7%.

Stephen Lamacraft
9 May 2018

Clouds lifting

Today we have seen full year results from Provident Financial, accompanied by an encouraging trading update, resolution of the company’s outstanding regulatory matters and a rights issue to raise £300m of additional capital. This brings closure on a number of uncertainties which have weighed on the company’s share price since last summer.

Today’s announcement confirms that the Vanquis repayment option plan (ROP) product that was subject to the regulatory investigation has not been mis-sold or mis-priced. In fact, it can continue to be sold. Historically, the fee for this product had been added to customer balances and if those balances had not been cleared, interest was charged on the full amount. Provident Financial will now refund these historic interest charges to all affected customers. A regulatory fine has been administered but, at less than £2m, it is at a level that is a tiny fraction of the worst-case scenarios that had been cited by some analysts. The additional capital being raised by the company will be used to cover the cost of these regulatory provisions and to strengthen its balance sheet, as required by the Prudential Regulatory Authority.

Meanwhile, the recovery of Provident Financial’s home collected credit business remains on track, with customer numbers already above the level that we had anticipated and collection rates continuing to improve.

This has been a painful chapter in the history of Provident Financial. Having said that though, throughout this difficult period, which started in the summer of last year, we have remained focused on the fundamental value of the business. Our thorough analysis pointed unequivocally to a completely disproportionate stock market reaction to these events.

We can now look forward to this company returning to normal through the remainder of this year and into 2019 with a stronger balance sheet, an investment grade credit rating, a 10% return on assets and in excess of a 25% return on equity. A nominal dividend will be paid in 2018 and a normalised 1.4x covered dividend will be paid in 2019.

Looking forward, we expect the business to establish an industry-leading working relationship with the regulator and to rebuild its reputation as the premier company in this significant and under-served part of the credit market.

Neil Woodford
27 February 2018

Appointment of new chief executive

The company has today announced the appointment of Malcom Le May as chief executive, with immediate effect. Le May has been serving as interim executive chairman since November 2017, and a search for a new external chairman has been initiated. After six months without a chief executive, this is an encouraging development, given Le May’s existing knowledge of the company, and it was accompanied by a brief, but reassuring trading update.

There remains much work to be done to restore Provident Financial and its reputation in the stock market. The business has been damaged by the problems in home credit, but not irretrievably so. Today’s news confirms that progress continues to be made with respect to the company’s ongoing rehabilitation, as previously evidenced in company’s January update.

Alex Correia
2 February 2018

Neil's View

It is critically important that I remain disciplined in my investment approach and not let emotion cloud my judgement. This applies as much to what happened to Provident Financial last year as it does to any investment decision and I would urge any investor to try to bear this in mind in their own decision-making. It can help one to avoid compounding a mistake by selling at the wrong time and price.5 January 2018

Clearly owning as much as I did in Provident Financial has been harmful for the funds because the stock has fallen a hell of a long way in my view a disproportionate amount. Clearly the share price should have fallen to reflect the profit warnings that we’ve seen. But I think the stock market yet again has become hysterical and yet again has multiplied many times the impact of these problems in the home credit business.6 September 2017

I believe Provident Financial shares started the day undervalued and have become even more so as a result of the market’s reaction to today’s news. I am hugely disappointed by what has happened to the consumer credit division but I continue to believe that it will ultimately get back on track. When it does so Provident Financial’s share price deserves to be appreciably higher than it is today.22 August 2017

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund’s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

© 2019 Woodford Investment Management Ltd.
All rights reserved.

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