Despite the problems Provident Financial (LSE: PFG) has brought upon itself through a series of internal missteps over the past year, famed fund manager Neil Woodford still has full belief in the sub-prime lender to turn itself around.
For proof of Woodford’s faith, we need look no further than his participation in the company’s recent £331m rights issue that took his holding in the firm up to 24.41% of all of its outstanding shares.
On the face of it, it’s hard to see why Woodford would participate. After all, Provident helped lead to record losses at his flagship Equity Income Fund last year, the business lost gobs of money last year, and competitors are making progress in stealing market share from it.
However, I don’t believe his optimism is completely misplaced.
Better than expected
For one, the aforementioned rights issue was a boon on several fronts. It shored up the group’s balance sheet and the net proceeds of £300m received were well below the £500m some investors were estimating the lender would need to raise from shareholders.
The rights issue announcement also included details on the FCA investigation into the group’s credit card arm, Vanquis, and auto loan division, Moneybarn. The Vanquis issue has been closed and Provident’s fine and customer restitution bill of £172.1m was far below the worst case scenarios the market had priced in. The Moneybarn inquiry is still ongoing but management has decided after speaking to the FCA that a £20m provision should be enough to cover the eventual charges.
A very hidden diamond in the rough
Furthermore, underneath these exceptional charges there still lies a solidly profitable business. Adjusting for these FCA fines and customer restitution, restructuring costs of £32.5m and amortisation of the Moneybarn acquisition, pre-tax profits for 2017 came in at £109.1m.
Granted, this is more than 65% lower than the £334.1m posted the year prior and these exceptionals were actual cash charges. However, if these costs are one-offs, as they should be, Provident is still in decent shape with its post-rights issue core capital ratio a healthy 28.7% and Vanquis and Moneybarn continuing to grow profits during the year.
And there are signs of a nascent recovery in the core consumer credit division. The botched transition from using self-employed agents to contracted employees was incredibly harmful last year but steps to bring back some of the agents who left, improved IT support for them and other attempts to reconnect with disgruntled agents has seen performance improve in recent months.
These attempts to get agents back to work issuing and collecting loans has resulted in collections performance rising from 57% in August to 65% in September and 78% in December. Over the last quarter of the year there was also an increase in active customers of 30,000, showing customers who were ignored when agents left are being brought back into the fold. This is important as it shows Provident hasn’t had its reputation damaged beyond belief through its own missteps.
It’s good to see it repairing the damage it made for itself, and the positive news about the FCA investigations is very important. But while I don’t blame Woodford doubling down on his bet on the company, I’ll be waiting for further improvements in the core business before I’d begin a position in Provident.
