Cube UK Report (03 May 2021) – Provident Financial stays schtum

Cube UK Report (03 May 2021) – Provident Financial stays schtum

Good morning, it’s Roland here with today’s report.

I hope you had a relaxing bank holiday weekend. It’s a quiet start to the week in terms of corporate news, with very few significant announcements on the RNS feed this morning.

One item that was picked up by some newspapers over the weekend were the continuing problems at former FTSE 100 lender Provident Financial. The company is reported to be considering the closure of its doorstep lending business, which I believe is the UK’s oldest. Provident has issued an RNS statement this morning, so I’ll take a look at that.

I’ll also take a look at the latest quarterly update from fast-growing digital marketing group S4 Capital, which is run by WPP founder Sir Martin Sorrell.


Provident Financial

  • Stock data should display here.
Market cap £620m
RNS Operational review of CCD – update
Writer disclosure No position

The picture above gives a fair idea of what I think is happening to Provident Financial, which has been in the doorstep lending business since the 1880s.

Over the weekend, the Mail on Sunday reported that Provident plans to shutdown its doorstep lending division (Consumer Credit Division – or CCD) and its online loan business Satsuma. Both cater to the sub-prime end of the credit market – high-cost, short-term loans.

According to the newspaper, Provident will focus on its banking and credit card business, Vanquis Bank, and its car finance business, Moneybarn. Both of these are also bad credit lenders, but their representative APR rates are c.40%, rather than 500%+.

The current situation has come about because the CCD business is struggling under a wave of compensation claims. Provident has been trying to gain approval for a scheme of arrangement to cap its liabilities at £50m. Management have warned that the CCD business may fall into administration if the scheme is not approved.

Today’s RNS confirms that an update will be provided with the firm’s results next week, but does not confirm (or deny) the weekend newspaper reports.

My view

We’ve already seen payday lenders like Wonga disappear from the market. Guarantor loan firm Amigo Holdings is also on the ropes due to the volume of claims being made against it.

In my view, the closure or managed run-off of Provident’s CCD and Satsuma divisions is probably a foregone conclusion.

You might argue that the current wave of claims is being driven by opportunistic legal firms searching for a new gravy train to replace PPI. I think that’s probably true. But as with PPI, these claimants appear to be pushing on an open door.

Claims against Provident Financial rose by 200% during the second half of last year. The company paid out £25m to claimants during the period, while also “processing balance reductions” (i.e. writing off debt) of £11m for existing customers. To me, this suggests that many of the claims being made against Provident Financial are quite well founded.

The company’s bid to cap these liabilities with a £50m scheme of arrangement seems cynical and unrealistic to me, based on these numbers. It would mean that all claimants would be forced to share the £50m pot, resulting in payouts well below the full value of their claims. As I understand, the scheme is now being voted on by its creditors (CCD customers, past and present). A result is expected in late July.

I’ll resist the temptation to get into a debate about the ethics of Provident’s high-cost lending model. But in purely financial terms, I do not see this situation as a an attractive investment.

Two of the group’s four business units could face closure in difficult circumstances. The two remaining businesses could face tightening regulation over time, eroding their profitability. Both Vanquis and Moneybarn have had brushes with the FCA in recent years.

A further concern is that without more detailed research, it’s not clear to me what the financial profile of Provident as a group would be if CCD and Satsuma were run-off or closed.

For me, Provident stock is a special situation at best. It’s not something I’m inclined to pursue.


S4 Capital

  • Stock data should display here.
Market cap £620m
RNS Operational review of CCD – update
Writer disclosure No position

Sir Martin Sorrell is not given to understating his own achievements. And perhaps with good reason. He built WPP into a FTSE 100 group. Since leaving the firm in in 2018, he’s built all-digital rival S4 Capital into a £3bn firm with annual run-rate revenue of nearly £500m.

Today’s third-quarter update is headlined in typical fashion “S4 Capital grows one-third like-for-like”. The numbers do seem to be quite strong:

  • Reported revenue up 71% to £122m, up 35% LFL
  • Reported gross profit up 71% to £104m, up 33% LFL
  • Cash flow said to “remain strong” with average net cash of £50m following July 2020 equity raise
  • Bond issue planned to “enhance merger transaction firepower”

WPP was built with acquisitions. Sir Martin has stayed true to this model with his all-digital venture. Another corporate combination was announced today. S4’s MightyHive business will combine with Brazil-based Raccoon Group to expand its scale in Latin America. The combined business will specialise in digital paid advertising, search optimisation and data analytics.

My view

S4 Capital now believes that it has a “strong chance of achieving the Group’s three-year plan of doubling organically”. Personally, I’d argue that regular acquisitions and mergers may make it difficult to split out organic growth from acquisitive growth over this period. But I’m in no doubt that this business is growing fast.

So far, investors who backed Sir Martin’s digital-only venture have been richly rewarded. SFOR shares have risen by 350% since the start of 2019.

The latest consensus forecasts I can see price the stock on 45 times 2021 forecast earnings, falling to a P/E of 34 in 2022. The stock’s lack of movement this morning suggests to me that today’s trading update was broadly in line with these expectations.

S4 Capital’s share price clearly prices in continued growth. But I don’t think the stock is necessarily too expensive. It’s not something I’d buy at current levels, but I could see this becoming a more valuable business over the next few years.


That’s all I’ve got time for today, thanks for reading. I should be back with you on Thursday.

Regards,

Roland

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