Provident Financial Interim Statement

On Friday, October 13, PFG shares jumped about 12.2% to 887p, from 790.5p the day before, giving me a profit of 8.68% (up £53.15) on my 75 share position. This happened because PFG published its latest trading statement that morning at 7am.

In it, the most important points were the confirmation of the guidance provided on 22 August 2017 of a loss for its Consumer Credit Division between £80m and £120m for this year, and the confirmation that it was not paying a final dividend this year. I consider this positive news (at least things didn’t get any worse), as did the market (obviously). The main points covered were:

Consumer Credit Division

  • Implementation of the new operating model in the home credit business on 6 July 2017 resulted in severe disruption. The leadership team was changed in late August and a recovery plan was developed to retain the current model and allow the business to own and manage the entire customer journey, and to focus on reestablishing relationships with customers, improving collections and stabilising the business. Several specific measures include hiring more people, more training for new employees, and using improved software for field and activity management;
  • Collections improved from 57% in August to 65% in September, sales improved to £6m per week lower than the prior year from £9m per week lower in August, but receivables were at £316.3m, down 33% from June 2017 (June 2017: £471.7m, September 2016: £489.2m);
  • Satsuma increased customers from 66,000 at June 2017 to 71,000 at September 2017, and receivables increased from £25m to £32m. It’s expected to have a small loss for the year, modestly below previous guidance due to a lower inflow of potential customers from home credit.

Vanquis Bank

  • New account bookings during the third quarter were 5% higher year-on-year;
  • Customers grew 13% and receivables grew 14% year-on-year;
  • The Vanquis Bank app now has 300,000 registered users;
  • Delinquency levels remained stable but risk-adjusted margin decreased to 30.7% from 31.4% in June 2017;
  • Retail deposits increased from £1,065m at June 2017 to £1,207m;
  • Vanquis Bank continues to work with the FCA on the investigation into the Repayment Option Plan.

Moneybarn

  • Customers and receivables grew about 25% year-on-year, to 49,000 and £362m respectively (September 2016: 39,000 and £286m);
  • Risk-adjusted margin decreased to 22.7% from 23.4% at June 2017.

Capital

  • Common equity tier 1 ratio of 21.2% (down from 21.5% in June) and gearing of 3x (up from 2.7x in June) as of September 2017;
  • At 30 September 2017, the group had £194m in cash, headroom on debt facilities of £70m, and Vanquis Bank had additional deposit capacity of £92m, giving total funding capacity of £356m;
  • Cash and funding capacity were reduced by £120m, to £74m and £236m, respectively, following repayment of the 2012 retail bonds on 4 October 2017;
  • Maturities in 2018 include £15m due in January 2018 for the M&G term loan, and £20m due in March 2018 for the private placement loan notes.

The search for a new CEO is still ongoing but we can already see a little improvement in collections in the home credit business, Vanquis Bank and Moneybarn delivered very strong growth, and the group has more than enough capital to meet its debt commitments in 2018, making me even more confident about my initial price estimate of about 1,670p to 2,600p per share at year-end 2018.

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