Credit cards drive Provident Financial

Even though Provident Financial's (PFG) home collected credit business remains under pressure, the sub-prime lender's credit card operation continues to bound ahead. Management expects the full-year figures for 2013 to be in line with previous guidance and market expectations.

Reflecting strong fourth-quarter demand, the Vanquis credit card unit saw UK customer numbers rise 22.2 per cent in 2013 to 1.1m, while average receivables jumped 37 per cent. At the same time, delinquency levels have remained stable at record low levels, helping Vanquis generate an annualised profit margin of around 34 per cent. Management is also looking to roll Vanquis out into Poland and has launched a pilot scheme there, which will involve a £7m-£8m cost in 2013.

Poor customer confidence and continued pressure on disposable income from food and utility price hikes kept up the pressure at the home-collected credit business. Customer numbers slipped 17.3 per cent year on year, with year-end receivables having fallen 15 per cent. Costs worth £10m were cut in the second half, and management is now working to reposition the business. Specifically, in October Provident launched a potentially high-growth online instalment credit called Satsuma, which it hopes will grab business from payday lenders. The aim is to become a top-three player in the rapidly expanding online consumer credit market within three to five years.

Shore capital says...

Buy. We remain bullish on future prospects for Vanquis in the UK, which could see profits double again in due course. We also see significant value in Satsuma and Vanquis Poland. Market conditions for the home credit business do remain difficult, but the company is getting to grips with this issue. In particular, collections and arrears performance stabilised in the fourth quarter, following a period of deterioration. Future profit performance here should also be protected by ongoing cost savings. Trading on 14 times our earnings forecast for 2014, and with a dividend yield of 5.6 per cent, we retain our positive stance. Our price targets stands at 1,711p.

JPMorgan Cazenove says...

Overweight. We believe the market should be reassured that the potentially tricky Christmas period has been successfully negotiated. In our view, Provident offers a predictable, high-return profit (and cash) stream from its core home credit business and exposure to a high return, but high growth, credit card book. This results in an attractive total shareholder return, with high single-digit or low double-digit earnings growth, together with an attractive yield. The shares are materially undervalued and, based on a price-to-net asset value model, our price target stands at 1,911p. Expect 2013 pre-tax profit of £199m, giving adjusted EPS of 113p, and an 84p dividend.