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…