The rapid loss of value from shareholders is shocking. It is a remainder of the (not so recent) financial crisis when banks were on the firing line, as the biggest financial institutions went bust, acquired or lost over 90% of their market value.
There is some similarity with Provident, given it is a subprime lender. But, management is insisting this rapid deterioration is an internal issue, not an economic slowdown of the UK economy.
We will see.
Now, let’s assess the impact of their last three major updates and results.
June’s trading statement
Provident mentioned weaker collection period, due to recruiting 2,500 full-time staff. That is understandable, but it didn’t give specific details on their collection performance (very important).
Also, it didn’t care to mention the number of self-employed agents converting to this new arrangement. That’s important because recruiting 2,500 staff from scratch will disrupt Provident home credit division leading to a severe loss in sales. So, I’m sure that some have stayed on, but we don’t know how many talented people were lost.
They did give some financial detail, saying weaker collections contributed to a shortfall of £15m in profits. Also, it has promised that the collection period will be normalised by July.
Pre-exceptional profits from their Consumer Credit Division has fallen to £60m from £115m.
Provident’s Interim Results
Here is a summary of the key data: –
Revenue is reported at £619.4m, up from £571.6m.
Operating Costs rose to £296.5m from £228.9m.
Total Costs rose to £529.4m from £406.2m.
Profit before tax fell to £90m from £165.4m.
Exceptional Items of £21.6m.
Net cash flow fell to £45.5m from £101.3m.
Details from the individual division: –
Vanquis Bank manages profit before tax (PBT) of £100m, unchanged from last year.
CCD was the loser with PBT coming in at £6.3m from £43.5m.
Moneybarn saw profits improve to £16.9m from £13.6m.
Other important details to note are: –
The group impairment charge rose to £221.9m from £157.8m. This gives a default rate of 35.8% from 27.6%.
It mentioned the FCA was looking at credit card abuse by financial lenders and are reviewing policies. No mention of Vanquis Bank.
August’s trading statement
So, when the CEO resigned the “real” truth starts coming out. As you know the statement is so toxic that shares fell by 66%, which is the reminiscence of the financial crisis when banks’ stock fell 30% to 40%.
Now, I am going to interpret this new information and explain the significances of this misrepresentation.
Home Credit Trading or CCD
Previously, the lender downgrades their CCD division to pre-exceptional profits to £60m for the full year, down from £120m last year. Now, it will record pre-exceptional loss of between £80m and £120m.
Worse, is they have lied about the new operating system is up and running, as it continues to experience problems.
The CCD collection performance is running at 57% from 90% in 2016. But, Provident is vague on the £9m loss of sales per week.
What period does it cover?
How much have sales in CCD deteriorated?
Given the low collection performance at 57% and knowing that last year sales are £518.8m, then putting two and two together means CCD could see sales of no more than £300m!
Provident states: “The trading performance of Vanquis Bank, Moneybarn and Satsuma remain in line with internal plans.”
That isn’t completely true when Vanquis Bank’s Repayment Option Plan (ROP) is under FCR investigation. That plan contributes £70m in sales or 13% of division sales.
If guilty, Vanquis Bank will face a penalty charge and compensation charge which would result in tens of millions of pounds.
Essentially, this means Provident two biggest division which accounts for 90% of PBT would cause the whole group see some serious setbacks.
WARNING: That means Provident Financial has MISREPRESENTED THEIR INTERIM RESULTS!!!
Interpreting the Misrepresentation
With the pre-exceptional loss of between £80m and £120m from their home credit division and the uncertainties surrounding the profitability of Vanquis Bank’s £200m PBT.
Putting what we know together, we can break down the full-year PBT of each division:
CCD: – £100 loss before tax;
Vanquis Bank: – £150m PBT;
Moneybarn: – £40m PBT;
Central costs would reduce PBT by £20m. Therefore, you get an aggregate PBT of £70m. That is adjusted PBT, and I’m being generous! So, expect some hefty write downs which would push Provident to an accounting loss.
WARNING: When Provident report their AUDITED full-year results expect some serious write-downs and revision from their interims.
What You Should Do
Provident is going through a transitional phase. The impact on their home credit division isn’t explained in detail (no specific period mentioned as they lose £9m per week in sales)
On an earnings power basis, the £70m normalised profit should fundamentally value the shares at £4.31, which is 47% below their current share price of £8! And given the uncertainties over staff talent, home credit and the investigation into Vanquis Bank’s ROP, the £4.31 per share seems justified for now.
The company cancelling their dividends would help to reduce cash outflow but we won’t see this effect until next year.
Looking at the technical charts, Provident’s share momentum is negative.
Share Price Forecast
Provident’s reputation took a substantial hit. For the next six months, Provident could trade below £6 per share, until it reports their full-year results. Unless we get news from the FCR investigation and update from their home credit division. Investors would come to realise that reputational damage would require several upbeat statements for trust to be regained.
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The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.
Finally, the writer does not own the company’s stock.