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Exploiting a Brexit discount

The disconnect between the strong growth prospects of the Aim-traded specialist bank and a modest rating should correct itself when there is greater clarity on the UK’s departure from the EU.

Aim-traded specialist bank PCF (PCF:32p) has issued a robust trading statement ahead of publishing its annual results on Tuesday, 4 December, and one that revealed a 54 per cent hike to £338m in the company’s lending portfolio, almost hitting the board’s £350m lending target 12 months ahead of schedule.

mportantly, an increasing proportion of new business originations are to prime borrowers, representing almost three-quarters of all new loans in the 12 months to 30 September 2019. This strategic move to improve the quality of the loan book has been driven by the lower cost of funding provided by PCF’s banking licence. Indeed, PCF’s retail deposit base has increased from £191m to £265m. The bank has also put in a place a £15m Tier 2 capital facility to increase the capital base required to maintain lending momentum towards its next portfolio target of £750m by 2022 when the directors expect to make a return on equity of 15 per cent, up from 12.5 per cent forecast in the 2018-19 financial year.

Importantly, credit quality remains sound. Impairments remain unchanged at 0.9 per cent of receivable balances since the interim results, a satisfactory level of write-downs at this point of the credit cycle after taking into account the accelerated portfolio growth rate. The fact that PCF’s net interest margin (NIM) only dropped from 8.2 per cent to 7.9 per cent year on year was impressive given the higher proportion of lower-margin prime lending. Retail depositors receive an average interest rate of 2.1 per cent on deposits, highlighting the PCF’s ability to recycle the low-cost funding into both business lending to small and medium sized enterprises (SMEs), mainly for vehicles, plant and equipment, and consumer lending concentrated on nearly new and used cars. I would flag up that PCF has no exposure to personal contract plans (PCPs).

Moreover, PCF has been successfully diversifying its lending lines, too. For instance, the October 2018 acquisition of Azule, a specialist funding provider to individuals and businesses in the broadcast and media industry, generated fee income of £1m through its hybrid brokerage and ‘own book’ business model. PCF has also dipped its toe into residential property bridging finance, making £14m of loans this year.

So, with impairments low, and the quality of the loan book improving, analysts at house broker Panmure Gordon predict a step change in PCF’s profitability driven by the operational leverage of the business as lending volumes ramp up. This explains why they pencil in a forecast 52 per cent increase in pre-tax profits to £8.2m on revenue of £23m (2018: £14.7m) in the 12 months to 30 September 2019, increasing to pre-tax profits of £10.9m on revenue of £29.6m in the 2019-20 financial year, and pre-tax profits of £14m on revenue of £37.9m in the 2020-21 financial year.

On this basis, expect earnings per share (EPS) of 2.9p in the year just ended to rise to 3.6p and 4.7p, respectively, over the next two years. That’s good news for the payout as Panmure forecast a dividend per share of 0.4p a share this year (0.3p in 2018), rising to 0.6p in two years’ time.

Having included PCF’s shares, at 27p, in my 2018 Bargain Shares Portfolio, and banked dividends of 0.49p a share to date, I continue to believe that my 50p fair value of the equity – equivalent to a September 2021 price-to-book value (PBV) of 1.64 times and a target price/earnings (PE) ratio of 10.5 for the 2020-21 financial year – is a sensible target price.

I also strongly feel that the Brexit discount embedded in PCF’s current valuation – the shares only trade on a PBV of 1.3 times for the financial year just ended – and one that has held the share price back since I last suggested buying, at 34p, at the time of the interim results (‘PCF lending targets support accelerated profit growth’, 5 June 2019), is set to unwind when there is greater clarity over the UK’s departure from the EU. This is a very good time to buy


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