Banking on PCF

In the six months to the end of March 2018, PCF increased its pre-tax profit by a fifth to £2.1m, buoyed by a 40 per cent year-on-year hike in the loan book to £179m. New business orientations almost doubled to £69m on the same period in 2017, a positive trend that has continued into the second half. Indeed, chief executive Scott Maybury revealed to me that new business on PCF’s retail book (mainly second-hand motor vehicle loans) hit a record for the first three months in 2018. It also accounted for £6m of the bank’s record £14m-worth of new business in March. Lending to small- and medium-sized enterprises (SMEs) that raise finance for commercial vehicles and plant is booming, too, as is leisure lending activities that includes financing classic cars and horse boxes. The ongoing loan growth certainly suggests that PCF should achieve Panmure Gordon’s year-end loan book forecast of £219m, and is well on its way to double the size of the loan book to £350m by September 2020.

Bearing this in mind, having gained its banking licence last summer, PCF’s cost of funding is benefiting from access to retail depositors. Mr Maybury revealed that PCF now has around £115m to £120m of customer deposits, up from £108m at the end of March, and incurs an average cost of only 2 per cent. That’s well below the 4.5 per cent cost of its £72m wholesale funding. Moreover, PCF tapped the Bank of England’s Term Funding Scheme before it closed in February, borrowing £25m at base rate over a four-year period, thus offering another cheap source of funding. PCF also plans to launch a corporate savings product later this year.

The other benefit of cheaper funding is that the quality of borrowers is improving, with “70 per cent of all new business orientations in the top four credit grades". That’s good news for impairments that “will be around 0.7 to 0.8 per cent of the loan book going forward”. Expect net interest margins to be around the high 7 per cent level at the full-year stage, highlighting the gains to be made by recycling low-cost deposits into higher-grade customer lending. Indeed, assuming all goes to plan, PCF’s pre-tax profit could more than double to £10.9m by 2020, according to analysts at Panmure Gordon, implying the shares are rated on 10 times those forward earnings.

Trading on two times likely book value in September 2018, I feel the potential for PCF to lift EPS by almost two-thirds to 3.1p in the 2019 financial year, and by a third to 4.1p in the 2020 financial year, is still not fully embedded in the price. Buy.

■ Simon Thompson's new book Successful Stock Picking Strategies was published on 15 March and can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source and is priced at £16.95 plus £2.95 postage and packaging. 

Simon's second book Stock Picking for Profit has now been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order..