Shares in the consumer credit firm jumped sharply on the day, as the currently chief executive-less company told investors that its progress was in line with its recovery plan.
In its Q3 update, the UK sub-prime lender announced a pre-exceptional loss for its floundering consumer credit division between £80m and £120m for 2017.
The firm also made good on its promise to scrap its full-year dividend, as announced in its last trading statement.
However, executive chairman Manjit Wolstenholme offered reassurance that a recovery plan has been developed and a number of actions have been implemented to get the struggling credit firm back on track.
The search for a replacement for former chief executive Peter Crook, who left the firm abruptly in August, is underway, Wolstenholme confirmed. He added that Provident Financial subsidiary, Vanquis Bank, currently under investigation by the Financial Conduct Authority, was cooperating with the regulator and “delivering good growth.”
“Since the last update, we have moved quickly to appoint new leadership in home credit who have a deep understanding of the business and recognise the importance of the relationship between our front-line staff and our customers,” said Wolstenholme.
Good news for Woodford and Barnett
At the time of writing, Provident Financial’s shares were up more than 16% to £9.16p. Since the group’s infamous trading day in August, when shares plummeted more than 70% after its second consecutive profit warning, its share price has recovered 56%.
The share price movement was undoubtedly welcome news for mega managers Neil Woodford and Invesco Perpetual’s Mark Barnett, who remain the firm’s largest shareholders.
On Tuesday, ahead of the doorstep lender’s update, Invesco Perpetual bought another 1.8 million shares in the company, taking its total stake closer to 30%, according to data from Bloomberg.
Still reasons to be cautious
While “markets clearly like what they see… there are still reasons to be cautious”, said Laith Khalaf, senior analyst at Hargreaves Lansdown.
“Companies in recovery can go one of two ways, and the rewards, or losses, are usually high,” he said.
“Provident still doesn’t have a CEO, and the financial watchdog is investigating sales of its Repayment Option Plan [ROP] to Vanquis Bank customers, a product which looks a lot like PPI.
“Meanwhile the group’s credit rating is teetering on the edge of being downgraded to junk, a step down which would limit the availability of creditors, and push up the price of borrowing.”
Prior to Provident Financial’s Q3 update, Liberum analyst Portia Patel called its home collected credit business “permanently damaged” and one of the primary reasons the investment bank recommends selling the stock.
“The greatest value is clearly in Vanquis, but we are genuinely concerned about underwriting quality. Moreover, we believe the balance sheet needs strengthening and that is before accounting for a yet unquantifiable potential liability for ROP. In conjunction with accounting and regulatory concerns, there is far too much risk to justify buying the shares now.”
Goldman Sachs, on the other hand, took a more neutral stance on the doorstep lender’s update, noting that there are key upside and downside risks.
“We are Neutral-rated on Provident Financial and our 12-month price target is 900p,” the firm said.
“Our 12-month price target uses a sum-of-the-parts (SOTP) methodology: assuming a 14% cost of equity (COE) for the earnings (2018E) of Vanquis, and a 10% COE for the earnings associated with Moneybarn (2018E), Satsuma (2019E), and the group centre (2018E).”
