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 in 2017 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 we remain fully engaged with the business as it navigates through the process of rehabilitation. In our view, the business is now on an appropriate 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.
|Income Focus Fund||4.96%|
|Equity Income Fund||4.81%|
As at 31 December 2018
|Themes||UK domestic exposure|
Provident Financial’s share price has been hit this morning following a trading statement. Cutting to the chase, the company has guided analysts and the market to expect full year numbers to come in towards the lower end of forecasts, which range from £151m to £166m. This represents a modest downgrade of approximately 4%.
Within the divisions, the Consumer Credit Division (home collected credit) is performing in line with the update provided in Q3 last year. Problem balances are now less than 10% of receivables and the plan for 2019 is to grow customer numbers and the loan book, whilst cutting the cost base. Everything seems to be on track here.
Moneybarn (used car credit), meanwhile, is performing well and is in line with expectations. New business is up 21%, customer numbers up 24%, with receivables showing a similar rate of growth.
Vanquis (non-standard credit cards) is the group’s largest division and it has seen better-than-expected growth in customer numbers for the full year, with receivables growth of 5%. Resolution of the ROP (Repayment Option Plan) issue is progressing well and should be fully resolved in Q2 this year with no attendant rise in complaints. The negative here is that there has been a small increase in impairments which is the cause of the downgrade. However, this increase in impairment is the direct result of some regulatory changes that were implemented last year – one relates to increased minimum repayments and the other to greater forbearance. Without getting bogged down in the detail, these changes have essentially brought forward impairment that would in all likelihood have occurred anyway, but later.
My view is that there is very little to see here, therefore, and certainly no change to the macroeconomic picture which would be more worrying for the stock. However, with employment strong and real wage growth coming through, the economic outlook for Provident Financial remains benign. As the recovery continues and the UK economy improves through the year, the business continues to look capable of delivering a very attractive rate of growth in 2019.
15 January 2019
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