Until last year, hopes that European sub-prime lender International Personal Finance (IPF) would mirror the success of its UK counterpart and former parent Provident Financial (PFG) had buoyed its share price. However, in the past 12 months increasing competition from digital and doorstep lenders has sapped new business for the group. More crucially, governments within its European markets have begun to clamp down on doorstep lenders, driving up its cost base. These pressures eroded the group's profits last year and have prompted City analysts to downgrade their earnings forecasts for this year and 2017. We reckon that competition and cost pressures will further erode the group’s profits, causing the shares to fall further.
- Bright spots in Mexico
- Fat dividend yield
- Regulatory pressures
- Increasing competition
- Broker downgrades for 2016 and 2017
- Loss of Slovakian business
IPF has been hammered by European legislation on consumer loans during the past 12 months. The group shut its Slovakian business last year after the government introduced a cap on interest rates charged on loans. The cap made its agent-led home credit business model too costly to run. As a result, management made an extra £19m charge on the Slovakian business and this year is focused on collecting the outstanding loans. Broker JPMorgan Cazenove reckons exiting Slovakia will cost maybe another £7m this year.
However, the onerous legislation doesn't stop there. A cap on all non-interest costs associated with consumer credit came into effect in Poland at the end of March. In response, management has launched new products, offering credit with longer repayment terms. IPF's bosses expect these changes to the product structure to offset maybe half the damage to the business's profits. Nevertheless, they also acknowledge that the legislation will progressively dampen its performance this year and during 2017. The Polish business was already under pressure - interest rates were capped and, including the effect of more customers taking longer and preferentially-priced loans, revenues fell 4 per cent in the Poland-Lithuania business last year.
Meanwhile, some of IPF's key markets also face greater competition. The Poland-Lithuanian business, which represented more than a third of income last year, is feeling the effects of more competition from online lenders and other payday lenders. As a result, customer numbers contracted by 2 per cent last year, falling to 832,000. In the Czech Republic the group faced similar difficulties. Exacerbated by management's decision to suspend lending in Slovakia in the run up to Christmas, customer numbers for the Czech-Slovakian business fell 12 per cent last year and credit issued was down a quarter to £150m.
Admittedly it is not all doom and gloom. Demand for sub-prime lending in Mexico has meant customer numbers in that country are growing fast. As a result, credit issued last year was up a fifth to £225m and revenue grew 9 per cent to £175m. Management has focused on expansion in the country and will open a further 10 branches this year. This will draw the business closer to achieving its target for 900,000 customers, of which it had 851,000 by the end of last year.
INTERNATIONAL PERSONAL FINANCE (IPF) | ||||
|---|---|---|---|---|
| ORD PRICE: | 277p | MARKET VALUE: | £612m | |
| TOUCH: | 277-278p | 12-MONTH HIGH: | 512p | LOW: 216p |
| DIVIDEND YIELD: | 5.1% | PE RATIO: | 8 | |
| NET ASSET VALUE: | 140p | NET DEBT: | 158% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 747 | 131 | 34.3 | 9.3 |
| 2014 | 783 | 100 | 38.2 | 12.0 |
| 2015 | 735 | 100 | 30.7 | 12.4 |
| 2016* | 737 | 94 | 30.1 | 12.8 |
| 2017* | 808 | 111 | 35.5 | 14.2 |
| % change | +10 | +18 | +18 | +11 |
Normal market size: 5,000 Matched bargain trading Beta: 1.2 *JP Morgan Cazenove forecasts, adjusted profit and EPS figures | ||||
