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With Provident Financial Group (PFG) shares down as much as 75% today, what are the chances that the sub-prime lender will go bust?
At least in the near-term, this looks unlikely. While the restructuring of debt collection operations is eating into finances, the core divisions of the business (including Buybarn, Satsuma and Vanquis) continue to trade in-line with management expectations. PFG could go it alone in the meantime – potentially even reverting to its previous method of self-employed agents undertaking debt collection in a bid to raise collection rates back to 2016’s 90% versus the current 57% performance reported today. Should that fail, in the long-run an outside source may look to swoop in on its assets.
With such a significant share price decline today, a European or North American sector peer (with International Personal Finance, Morses Club and Non-Standard Finance presumably too small to run PFG’s sizeable operations) could come in to absorb PFG’s outstanding loans into their own books; the 75% share price fall today may have some CFOs on the continent licking their lips at the thought of expansion. By incorporating their own (presumably fully functioning and more effective) collection strategies, the possibility of picking up cheap assets to become the new largest UK sub-prime lender could prove incredibly tempting.
However, the dark cloud still looming over PFG is the FCA investigation into the Vanquis Repayment Option Plan (ROP), which contributes roughly £70m in revenues. A substantial fine, removal of the provision and/or a PPI-esque string of claims by consumers who undertook ROP over its 2-year lifespan could be the final nail in the coffin for the business. Should this happen – and no buyers appear on the horizon – PFG may have to explore a dilutive equity raising plan, something that has only been postponed so far by the cancellation of the interim divi and the likely pulling of its FY divi too. Should that fail to breathe life back into the company, talk of a forced asset sale looks like the only option remaining its arsenal before eventually biting the bullet and calling it a day.
PFG shares are over 30% off their lows, reflecting some investor confidence that today’s share price drop may not spell the end of the group, although volatility is likely to remain over the course of next few days as the fate of the business becomes clearer.
Henry Croft, Research Analyst, 22 August 2017
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