Woodford Asset Management and Invesco Perpetual are two of the largest investors in Provident Financial, owning almost 40% of the business between them. We speak to Neil Woodford and Mark Barnett respectively to get their views on recent developments. We also share the views of our own Steve Clayton, who invests in the company through the HL Select UK Income Shares Fund.
What has happened?
Provident Financial’s share price fell 66% on 21 August, the second steep fall experienced this year. Its problems concern its household consumer credit division, which extends small, short-duration loans to consumers. Earlier this year, the business announced it would transition from a self-employed agent model to one where lending is conducted by full-time employees. It was hoped this move would allow the company to more effectively manage its customer relationships, and better fit the changing regulatory environment.
The transition to full-time employees has resulted in only 57% of loan repayments being collected, in comparison to an average of 90% previously. The group now expects this division to make a loss of between £80m and £120m this financial year. The business needs to get the collections process working before they are able to take on additional loans, which means they will miss out on the peak pre-Christmas period.
The group also disclosed that the Financial Conduct Authority (FCA) has concerns over another of Provident Financial’s divisions, Vanquis Bank. While the FCA investigates an issue with its Repayment Option Plans, Vanquis Bank has agreed not to pay dividends to the parent company.
As a result of the issues with the consumer credit and Vanquis divisions, the group no longer expects to pay a dividend this year. Meanwhile, long standing chief executive Peter Crook has stepped down with immediate effect, to be replaced on an interim basis by executive chairman Manjit Wolstenholme. Provident Financial has been demoted from the FTSE 100 to the FTSE 250 Index.
Neil Woodford and Mark Barnett’s view:
Provident Financial has built its consumer credit business over a period of 120 years. It offers a product that customers want and need and which no competitor has the scale of operations or the balance sheet to offer, according to Mark Barnett.
Although Neil Woodford and Mark Barnett work for different fund groups and often differ in their views, their outlooks for Provident Financial are relatively similar. While the interim dividend has been cancelled, and a final dividend now looks unlikely, Neil Woodford expects dividends to resume next year. Furthermore, he expects the dividend yield to be highly attractive to those that bought shares at current depressed levels. Likewise, Mark Barnett is confident this is a temporary measure.
The newly-organised sales force for the consumer credit division have failed to collect existing debts to the extent that had been anticipated or create as much new business as had been forecast. This is disappointing but the division will recover in time, according to the managers. In the meantime, the rest of Provident Financial’s businesses, which account for around 70% of the group (Vanquis Bank, Moneybarn and Satsuma), are all trading in line with management expectations. Therefore, despite this most recent profit warning, the Group is still expected to post a profit of at least £80 million this year.
Provident Financial was the Woodford Equity Income Fund’s fourth largest holding, and the sixth largest in both the Invesco Perpetual Income and Invesco Perpetual High Income Funds, so the share price collapse has negatively impacted performance of all three funds. However, the managers feel these recent falls have been overdone and have left the business attractively valued for those willing to look past short-term issues and focus on the company’s longer-term potential. They both intend to remain invested.
Steve Clayton – HL Select:
The manager’s reasons for initially buying into the company were predicated on its tremendous track record of cash generation and dividend payments to shareholders, and the group’s ability to generate high returns on equity, in both good times and bad. After speaking to the company earlier this year they expected the problems in the consumer credit division to be manageable and that after a period of time bedding in the new business model, the company would be back on an even keel. This assumption proved to be wrong.
The company faces a substantially greater challenge, following their latest revelations, in the manager’s view. Cash generation in the near to medium term will be severely constrained, and the company will need to prioritise securing additional funding in order to shore up its balance sheet. The HL Select UK Income Shares Fund’s aim is to invest in companies that can sustainably grow their cash flows and dividends. Provident Financial no longer fits with that objective and the manager has halved Provident Financial’s position in the portfolio to just under 1%.
The views expressed are those of the fund managers in relation to their funds. They are not a recommendation to buy, sell or hold any stock mentioned.