Why Provident Financial is up 87%!

It’s almost a year to the day since former Provident Financial (PFG) boss Peter Crook unveiled his ill-fated plan to overhaul the doorstep lender’s collection model. Shares at that point were changing hands at an impressive 2,917p and not far from recent record highs.

Today they are being offered to existing shareholders at just 315p after a calamitous year in which the restructuring of the home credit business backfired and the company found itself the subject of two regulatory investigations. Having made a profit of £343.9 million in 2016, Provident today racked up a loss of £123 million along with no final dividend.

The unravelling of Provident cost the job of Crook in the summer and left shareholders including fund manager Neil Woodford badly exposed. The gamble now for investors is whether the £300 million rights issue announced today represents a viable, cut-price opportunity to buy into the recovery story of a former FTSE 100 (UKX) business.

Woodford certainly thinks so, having joined fellow big shareholder Invesco in publicly backing the rights issue and plans of new CEO Malcolm Le May, who spoke today about his turnaround strategy and ambition to restart a progressive dividend in 2019.

The wider market also appears enthusiastic, with shares steaming ahead by as much as 87% at one point to stand at £11 for the first time since August. Some of this reflected relief that the fundraising is not as large as the £500 million reported yesterday.

Market movers and why Provident Financial has plunged again

Significantly, Provident has also removed a major uncertainty by agreeing a compensation settlement worth £170 million with the Financial Conduct Authority’s (FCA) following an investigation into whether Vanquis Bank properly explained charges on its Repayment Option Plan. It is now taking steps to resume sales of the product to new customers.

Provident also estimates that it will need £20 million to settle a separate probe involving Moneybarn, which provides car finance to about 46,000 consumers unable to get mainstream credit. The FCA’s investigation has looked at consumer affordability checks and the treatment of those in financial difficulties.

In the core home credit business, actions taken by management since August are starting to pay off, with 527,000 active customers and receivables of £352.2 million in line with Provident’s recovery plan. The division has been struggling since a botched overhaul saw the sub-prime lender replace self-employed agents with full-time staff.

Le May, who took the helm earlier this month, said today: “The group’s turnaround is making progress, but the board and I realise there is still much to do to achieve a customer centric business delivering long-term sustainable returns to our shareholders.”

He aims to restore dividends with a nominal initial payment for 2018 before returning to a progressive dividend policy the following year. Prior to the company’s difficulties, the total dividend was increased in 2017 by 12.1% to 134.6p.

Provident intends to have a dividend cover ratio of at least 1.4 times once the recovery plan in home credit has been delivered. This will be alongside maintaining a buffer over the group’s revised minimum capital requirement for a CET 1 ratio of 25.5%.

This figure fell to below regulatory requirements, at 14.5% by the end of 2017, although the heavily-discounted rights issue should improve the ratio back up to 28.7%. Around £50 million will be injected into Vanquis Bank as an additional buffer.

The fundraising, which is subject to shareholder approval next month, offers 17 new shares for every 24 held by shareholders at the close of business on March 19.

Subject to economic conditions, the company believes it can go on to target a return on assets of around 10% per year alongside receivables growth of between 5% and 10% as the home credit business moves back to profitability in 2019. The division swung to a loss of £118.8 million in today’s results.

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