On Monday, August 21, shares of PFG closed at around 1,750p. On Tuesday, August 22, PFG fell to below 450p, a drop of almost 75%, before closing the day at 600p, down 66%. On Wednesday, August 23, PFG closed at 675p, down 61%, and this is when I read the City A. M. article.
After researching the company and finding that it’s an excellent business with some temporary problems, I needed to value it and find out if I could buy it at a sizeable discount to intrinsic value (preferably in the order of 50% or so), so lets look at the performance for the last 5 years.
Last year PFG earned £334.1 million in profit before tax. Of this, Vanquis Bank contributed £204.5 million, Provident £115.2 million, Moneybarn £31.1 million, and Satsuma had a start-up loss of about £16.7 million. The company is now saying that Provident will not be profitable and will instead have a loss between £80 and £120 million. Therefore, if we assume growth of 17% (as per the CAGR on the above table) for the other divisions, adjusted profit before tax for 2017 might be about £239.3 – £120 + £36.4 – £15 = £140.7 million.
PFG has 145.9 million diluted shares in issue. The share price fluctuated between a low of 2,164p and a high of 3,367p in 2016, causing the company’s market value to fluctuate between £3.16 billion (2,164p*145,900,000) and £4.91 billion (3,367p*145,900,000). This gives me a price to 2016 adjusted profit before tax ratio of 9.45 (£3.16b/334.1m) to 14.7 (£4.91b/334.1m). Taking my estimate for 2017 and multiplying it by these ratios, I obtain a market value of £1.33b (£140.7m*9.45) to £2.07b (£140.7m*14.7) for the current year.
The share price closed at 675p on August 23, giving PFG a market value of £984.9 million (675p*145.9m), 26% lower than my lowest market value estimate of £1.33b, and 52.5% lower than my highest estimate of £2.07b. Based on the compounded annual growth rates for adjusted profit before tax (16.98%) and adjusted basic earnings per share (15.31%) for the last 4 years (above table), I believe that the higher price is the more appropriate one for this company.
Since I think the problems in the home credit business are temporary, I expect that adjusted basic earnings per share for 2018 will be much higher than this year, which will come to about 73p (£140.7m*76%(considering a 24% tax rate)=£106.9m; £106.9m/145.9m=73.27p). Considering only the 2016 adjusted basic earnings per share, I get a 2016 PE ratio between 12.19 (2,164p/177.5p) to 18.97 (3,367p/177.5p). Applying these same ratios to current year earnings, I obtain a share price between 893.16p (73.27p*12.19) and 1,389.9p (73.27p*19.97), which give me a market value for PFG in line with those on the previous paragraph. And these values are representative of an abnormally low earnings period.
Even if the home credit business doesn’t fully recover, and the company just returns to its average earnings for the past 5 years of 137.02p per share (see above table), at the end of 2018 I estimate the share price might be anywhere between 1,670.27p (137.02p*12.19) and 2,599.27p (137.02p*18.97), giving the company a market value between £2.44 billion (1,670.27p*145.9m) and £3.79 billion (2,599.27p*145.9m). The August 23 market price represents a discount of about 60% over my lowest estimate for 2018. Seeing all of this, I decided to invest.
I put in an order on August 24 to buy 75 shares at market. Unfortunately, by this time the price had already advanced to almost 800p, from a close of 675p the day before (an 18.5% rise), giving PFG a market value of £1.17 billion. But even at this price I had a discount of about 52% over my lowest estimate of £2.44 billion at yearend 2018, and a small discount of about 12% over my lowest estimate of £1.33 billion for the end of this year.
I bought 75 shares of PFG at 795.5p for a total investment of £596.62, which was roughly a quarter of the funds I had in my investment ISA. Besides this I had to pay a commission of £12.5 to execute the trade and stamp duty of £2.98, a total expense of £15.48 (2.59% over the trade value), making my total investment come to £612.10.
It really does not pay to make small trades, and to trade often. Commissions and expenses will take away most of your returns. Long term investors have the right mindset.
Today PFG closed at 892p (a 12% increase over my purchase price), making my investment rise to £669, a profit of £56.90 and a return of 9.3% over my cost basis (if only I had millions to invest…).
Will the share price rise or fall in the short term? I have no idea. If it rises, fine. If it falls, I might even buy more (I actually prefer that it falls so I can buy even cheaper). I do think, however, that the company will recover and the share price will go up in the long term. I just need patience.
And now my watch begins…