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Momentum builds at Provvy

Economic recovery, and a mainstream banking sector that's still picky about the customers it will lend to, should keep growth rolling in at Provident Financial
January 22, 2015

With the UK's economic recovery now looking well entrenched, but with mainstream lenders still very choosy about the customers they're prepared to lend to, growth prospects at sub-prime lender Provident Financial (PFG) - known simply as 'the Provvy' to generations of borrowers - should remain robust. And even though the shares are no bargain compared with those of its direct peers, they're not so pricey for the financial services sector more generally and they do offer an attractive dividend yield: over 5 per cent, based on broker Numis Securities' forecast payout for 2016 of 127p. As the Provvy continues to generate strong growth, investors can expect the shares to keep motoring.

IC TIP: Buy at 2513p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Credit card business growing fast
  • Satsuma online unit making progress
  • Small competitors hit by new regulation
  • Decent dividend yield
Bear points
  • Consumer credit arm still recovering
  • Shares not cheap compared with direct peers

Indeed, a trading statement this month confirmed that solid growth profile. Significantly, it revealed rapid progress at the core credit card arm, Vanquis, which generated around 70 per cent of group profit at the half-year stage. A customer acquisition programme boosted Vanquis' customer numbers by almost 18 per cent in 2014 to 1.29m yet credit quality has remained stable. "Vanquis has exceeded all expectations and has prospered through the credit crisis," note analysts at Numis. "Margins [at Vanquis] are now exceptionally high." Vanquis is also expanding into Poland - where there's thought to be an addressable market of up to 10m people - and a pilot scheme was launched there in 2012. That's lossmaking for now but is adding 4,500 new customers a month - double the rate at the start of last year.

But the Provvy offers more than just credit cards. Significantly, its Satsuma online instalment credit offering has been making good progress since its launch in October 2013 amid a rapidly growing online credit market. The trading update revealed especially strong demand for Satsuma's loans in the fourth quarter, helped by a step-up in advertising: year-end customer numbers and receivables reached 21,000 and £5m, respectively, a big jump from the 11,000 and £2.4m reported at the half-year stage. Admittedly, Satsuma remains modest compared with the Provvy's other operations but, importantly, the nature of the offering should allow it to compete well with the payday-type loans being offered by competitors.

PROVIDENT FINANCIAL (PFG)

ORD PRICE:2,513pMARKET VALUE:£3.68bn
TOUCH:2,512-2,518p12-MONTH HIGH:2,540pLOW: 1,607p
FORWARD DIVIDEND YIELD:4.4%FORWARD PE RATIO:17
NET ASSET VALUE:288p  

Year to 31 DecPre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
201116289.669.0
201217810077.2
201319611285.0
2014*22112693.5
2015*268148110.5
% change+21+17+18

*Numis Securities estimates, adjusted PTP and EPS figures

Normal market size: 1,000

Matched bargain trading

Beta: 0.78

What's more, the Financial Conduct Authority's (FCA) tough new regulatory regime - on 2 January a 0.8 per cent a day cap on interest and fees was introduced covering all high-cost, short-term credit - could yet work in the group's favour. Sure, the Provvy is subject to FCA regulation, too, but the move could yet decimate the group's competitors. Last year the FCA said that the new credit cap might force 99 per cent of the UK's 400 or so payday lenders to close - that shake-out could help drive customers to well-established sub-prime lenders such as the Provvy, with Satsuma in particular looking well-placed to benefit. That said, the high cost of borrowing in this sector is likely to continue to worry regulators and politicians and Satsuma's representative APR - at an eye-watering 794 per cent - could yet attract criticism.

The group's traditional home-collected credit arm, meanwhile, has been in decline for some years. Not only is competition relatively strong here, but the benefits of economic recovery have yet to really work through to the unit's customer base of low-paid, casual, temporary and part-time workers. Management therefore expects the division's profit in 2014 to be merely in line with 2013's outcome. Still, the business is being streamlined into a "smaller but leaner, better quality, modern business focused on returns", say management. That has involved improving credit quality and cutting back customer numbers and receivables. In August the group also added another string to its bow through the acquisition of sub-prime motor finance business Moneybarn. That has since seen a strong uplift in new business volumes given the operation's ability to access the Provvy's funding lines.