‘Now’s the time to own’ AIM bank PCF

The transition from a finance house to an authorised bank has long been seen as a potential game changer for PCF Group (PCF) – and that could be coming to fruition sooner than expected. We liked the stock back in February, and now a bunch of City experts is excited.

In a trading update, AIM-listed PCF, formerly Private & Commercial Finance Group, said Wednesday it was on course to beat market expectations for the year to 30 September. That led finnCap’s respected financials analyst Jeremy Grime to claim: “Now is the time to own this. It is a low risk bank with huge opportunity”.

PCF acquired its banking license at the tail-end of 2016, and its three-year project culminated in the mid-July announcement that it had gained regulatory approval to become a fully operational bank. Retail deposit operations began two months ago.

Since then, we’re told, PCF Bank has “exceeded expectations”, receiving around £51 million in deposits. “The new banking infrastructure is functioning well and customer feedback has been extremely encouraging”.

New business originations across the Bank for the 11 months to 31 August are 19.3% ahead of last year at £74.1 million, largely driven by lending to small and medium-sized enterprises, while the loan book has grown 17.5% to £142 million. Loan loss provisions of 0.5% are half the level of 2016 and at record low levels.

PCF is at pains to tell us it does not offer Personal Contract Purchase (PCP) products, which are being probed by the Financial Conduct Authority for potential mis-selling, within its motor finance division.

“There is excellent potential for growth in our proven, existing markets in the short and medium term,” chief executive Scott Maybury tells us. “And over the next three years asset diversification will provide greater acceleration in portfolio growth.”

PCF is targeting a 2.5% return on a £350 million loan book in three years and £750 million in five years, which is achievable and will increase its scale significantly, according to Panmure Gordon’s Shailesh Raikundlia.

Shares surged 16% to a six-month high of 27.5p Wednesday, breaking out of the 22p-26p range it’s traded since April. While analysts left their target prices intact, they moved up forecasts for final results, due 5 December.

Stockdale hiked full-year adjusted pre-tax profit and earnings per share (EPS) estimates by 10% to £5 million and 2.2p respectively. Panmure moved its adjusted EPS figure for 2017 up 16% to 2.06p. There are more modest increases for 2018 and 2019 EPS to 1.93p and 3.07p respectively.

On those new numbers, PCF trades on just 14 times earnings for the year to September 2018, dropping to less than 9 times for the year after.

While the banking division has made a flying start, Stockdale’s Robert Sanders notes that “the full benefits… [are] still to come through”. That is likely to happen by 2019, with profits expected in that full-year to be above £8 million.

Both Stockdale and Panmure have ‘buy’ ratings and target prices of 42p and 38p, respectively. Raikundlia says his target implies a forward price/book value of 2.1 times, which seems “fair for a bank targeting return on equity of 17.5% and loan growth of 35%”.

Raikundlia adds that PCF, which is 65% owned by Bermuda-based fund manager Somers Limited and its subsidiary Bermuda Commercial Bank, is a low-risk secured lending proposition with a 23-year track record.

If the new banking arm continues to go from strength to strength, there could be further profit upgrades. A break above 35p would represent the stock’s highest level since 2005, before financial crisis-related problems took hold.

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.

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