Can Provident Financial recover from latest setback?

The support of star fund manager Neil Woodford and many others in the City suggests that all is far from lost with Provident Financial (PFG). However, their faith in the former FTSE 100 (UKX) company is being sorely tested after the doorstep lender delivered yet more worrying news to add to the profits downgrades that have decimated the share price in recent months.

This time the bad news came from an unexpected quarter as Provident said the Financial Conduct Authority (FCA) had launched an investigation into its Moneybarn business, which provides car finance to about 46,000 consumers unable to get mainstream credit. The average loan is in the region of £8,200.

The FCA’s probe will look at consumer affordability checks and the treatment of those in financial difficulties. Provident insists it acts responsibly in all its relationships and points out that it has been in regular contact with the regulator ever since Moneybarn secured credit authorisation in June 2016.

This is a major blow to Provident because Moneybarn is seen as one of three growth drivers for the business while it sorts out the issues in doorstep lending. The others are Vanquis Bank and online instalment loans business Satsuma.

Provident went as far as to say in the summer that protecting these “highly valuable franchises” was the priority for the group, which has been struggling ever since a botched overhaul of its consumer credit division.

In contrast to the main operation, Moneybarn reported significant growth in new business volumes of 15% in half-year results, with adjusted profits up 24.3% to £16.9 million.

Currently down 11%, Provident shares had fallen as much as 20% to 704p as news of the FCA investigation snuffed out hopes it may be over the worst. As recently as 27 October, Panmure Gordon’s Shailesh Raikundlia published a ‘buy’ note alongside a target price of 1,200p, which at the time implied 35% upside.

This was issued after an update from Provident showed signs of stability in the consumer credit arm, helped by a move to employ more part-time staff. Having previously replaced 4,500 self-employed local agents with 2,500 full-time staff, Provident’s collection rate fell as low as 57%, versus 90% in 2016.

Panmure is in good company, however, with Neil Woodford now owning 21% of Provident after snapping up cheap stock post this year’s crash.

On Tuesday, Provident shares revisited historic technical support at just above the 700p level. Since the last major crash in August, the share price has traded sideways, meeting stiff resistance at 940-950p.

And with the FCA also investigating Vanquis Bank’s Repayment Option Plan, which currently generates top-line revenues of £70 million a year, Liberum believes there’s no reason to change its view that Provident is a conviction ‘sell’ and worth no more than 498p!

Analyst Portia Patel said Liberum had previously raised concerns about Moneybarn’s lending approach and rising impairment rates.

She added: “We see no evidence as yet to change our view that the home credit business has been permanently damaged.”

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.