Provident Financial's FCA authorisation 'critical', say analysts
Provident Financial's sub-prime bank and auto finance arms are making progress and while its doorstep lending unit continues to offer some concerns for analysts, there was optimism that a recovery is underway.
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At the end of last week the company issued a trading statement covering the period from 1 July to 18 October, with Vanquis Bank and Moneybarn both trading well and in line with management expectations but collections from the home credit business continuing to run around 10% below historical trends.
Barclays cut their target price to 753p from 770p, but said they believe Provident "is not an earnings story but a recovery story, and the operational recovery remains on track".
Barclays reiterated its 'overweight' rating with 35% upside to the price target, as Provident was making progress with its key operational objectives of repairing its relationship with regulators, repairing its home credit business and repairing its balance sheet.
In particular, the bank's analysts said with the operational recovery of the home credit business said to be "substantially complete", the FCA authorization process due to be concluded during the fourth quarter "will be the key catalyst for the company" as it could allow the company to add an element of variable pay to its field force to encouraging them to improve collections.
Analysts at Berenberg reiterated their 'hold' recommendation and 610p price target but agreed that FCA authorisation "is critical" to motivate the so-called customer experience managers effectively "and therefore central to the profitability of the model".
Broker Shore Capital cut its group earnings estimates for the full year and 2019 and 2020 by 5%, 5% and 4% respectively, which trimmed its fair value to 685p from 710p.
But, with the shares having fallen 7% since the start of October and 20% since July's interims, ShoreCap saw upside of 25% and so upgraded its recommendation to 'buy'.
"While the continued delay in collections improvement at the home credit business was disappointing, this is largely a back-book issue that we expect to resolve itself in due course," ShoreCap analyst Gary Greenwood told clients in a note on Monday.
"Importantly, the back-book accounts for around one third of gross receivables for the business, but these balances are now largely written down thus limiting the risk of a further drag on financial performance from higher impairments. However, where there will be an ongoing impact is from the book being smaller than expected and this therefore impacting negatively on future revenue performance. We expect this will delay the return to full year profitability until 2020."