Analysts take axe to Provident Financial ratings, estimates
Analysts at Barclays, Citi and JPMorgan took an axe to their ratings on subprime lender Provident Financial on Wednesday after it issued its second profit warning in two months the day before, withdrew its dividend, announced the departure of its CEO and revealed an FCA investigation into Vanquis Bank.
Financial Services
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17:09 19/04/24
FTSE 100
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16:59 19/04/24
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Vanquis Banking Group 20
48.60p
16:35 19/04/24
In an unscheduled trading update on Tuesday, the company said it now expects to make a pre-exceptional loss of between £80m and £120m in the home credit division as debt collection rates have fallen to 57% versus 90% in 2016, while sales were around £9m per week lower than the comparative weeks last year.
"The extent of this underperformance and the elongated period of time required to return the performance of the business to acceptable levels invalidates previous guidance," it said.
Back in June, the company said it expected the consumer credit division to generate a reduced pre-exceptional profit before tax of around £60m as it transitioned to a fully employed agent model.
Provident Financial also announced that Vanquis Bank was cooperating with an investigation by the FCA into the repayment option plan ancillary product. ROP currently contributes gross revenues, before impairment and costs, of approximately £70m per annum.
In light of the "substantial deterioration" in the trading performance of the home credit business and uncertainty created by the FCA's investigation at Vanquis, Provident said it was withdrawing the interim dividend declared in July and a full-year dividend is unlikely in order to protect its capital base.
Barclays cut the stock to 'equalweight' from 'overweight' and slashed the price target by 81% to 600p. The bank cut its earnings per share estimate for 2017 by 65% to 52p and its estimate for 2018 by 29% to 135.5p, assuming the consumer credit division makes a £120m loss in 2017 and breaks even the year after.
"Our base case is that the operational disruption is self-inflicted and can be remedied, with the newly organised salesforce eventually able to collect existing debts and resume gathering new sales, although not at the same effectiveness as before.
"However, downgrade risk is still present due to lack of visibility on timeline, measures to be put in place and how much further investment is required. With uncertainty over the FCA investigation and the size of the potential financial impact, we lack conviction and downgrade to EW from OW."
Citigroup downgraded Provident Financial to 'neutral' from 'buy' after the profit warning, pointing to "too much uncertainty", and withdrew its 3,000p price target on the stock.
"The uncertainty is too great at this stage, we believe. Though the outlook for FY18 from an operational perspective is more encouraging, the market’s focus in the short term will remain whether or not the company will get to that point given the outlook for potential liquidity actions in the coming months," the bank said.
Citi cut its diluted EPS estimate for 2017 to 66.5p from 153.3p and its estimate for 2018 to 79.2p from 187.4p.
Finally, JPMorgan reduced its stance on Provident to 'neutral' from 'overweight', chopping the price target to 1,200p from 3,200p.
The bank noted that no guidance has been provided for future periods, but said it assumes the worst case scenario of £120m will halve in 2018 and be flat in 2019. Meanwhile, in Vanquis, the ROP product is estimated to contribute £70m in gross revenues or around £50m in profits. Again, no guidance has been provided but JPM said it gradually fades down this profit contribution for the overall group to £40m/£25m/£0m in 17/18/19, respectively.
In aggregate, it cut its group earnings estimates for 2017/18/19 by 66%/52%/45%, respectively.
At 0900 BST, the shares were up 4.8% to 598.57, recovering from heavy falls on Tuesday which saw the stock drop a massive 66%, wiping nearly £1.7bn off its market value.