PCF (PCF) – Q&A report from AGM (8 March 2019)

PCF (PCF) – Q&A report from AGM (8 March 2019)

  • latest share price: 33.2p
  • market cap: £71 million

PCF held its AGM at 10:00 AM in a serviced office in the City. It was well-attended.

Formalities were interspersed with questions from attendees at the invitation of the Chairman.

An approximation of the question is in bold. The response from PCF is paraphrased in normal text and my thoughts are in italics.

The first question related to Directors’ remuneration and how it is possible to justify a 45% increase for the Chairman, and similar amounts for other members of the board.

The Chairman handed over to the CEO to tackle it.

The main justification given was that being a board member of a bank involves increasing degrees of responsibility and the assumption of more onerous obligations, together with the possibility of recourse to individual members of the board in the event of any wrongdoing.

The CEO went on to explain that this was now an experienced board, implying that it was one which was at a level of experience and expertise commensurate with a bank as opposed to a finance company. He explained that the board now required regulatory experience which justified a higher level of remuneration.   Furthermore, oversight from the PRA, who take an active view of governance, meant that the board had to be of a calibre consistent with that of a bank.

I view this ‘increased’ cost as one of purely being involved in this business area.  

In response, the questioner noted that 15% of the increase in spend (I presume in the last FY) was on executive/Non-executive remuneration.   How is this justifiable?

The CEO cited EPS growth. There was a swift retort that total shareholder return is a more appropriate measure.

A different questioner then seemed to go down a rabbit hole about why pay a bonus and why not just increase basic pay and how he felt the board weren’t incentivised to outperform.

The head of the remuneration committee largely answered this. Pay had been looked at independently within the market place and been benchmarked vs similar organisations.  They felt that as a result of the transition into a bank and along with the need to secure the executive team, the pay and structure of it was fair.

The questioner was hung up on salary vs bonus issues and wanting a greater salary component missed the whole point of variable pay.  He didn’t seem to realise that whilst the bonus was a high percentage vs the salary, it would not be paid in a bad year. Furthermore, paying all remuneration as a salary would actually lead to the CEO being less incentivised, as he wouldn’t be working for his bonus. It did seem like the question was a banker bonus question, without realising that the bonus structure was in his interest as a shareholder.

The same guy then asked ‘Can you explain to us how you are doing so well?’ 

Scott Maybury started by saying they are delighted with the first five months of this FY. The numbers are impressive, but from such a small base perhaps it is easy to report big percentage gains.   The key has been the use of cheaper funding, which allowed them to move into what they describe as a more prime area. ‘Turning the taps on’ in the prime area of the market has been a key development for the company.

They have a small market share which has gone from 1.75% to 3.5%.   This has allowed them to operate largely out of sight of competitors.   The increasing market share has resulted in a little more attention from competitors.

He then went on to talk about the importance of their broker relationships and how they are reliant on them for deal flow.   Their MO is to provide very good service, make it easy for the brokers to work with them by offering a rapid turnaround so that it becomes easy for brokers to put business their way.

Scott became animated when discussing this point and I did get the feeling he was energised by his business and must enjoy it to talk in such a way about it.

A follow up question asked for his definition of prime.

Realistically and whether intentionally or not there wasn’t a forthcoming definition. In essence, they are more prime than they were before.

I suspect that Scott didn’t want to define their working definition of Prime for commercial reasons by the way he answered it.   It probably makes sense to not give your competitors your client base parameters.

The elephant in the room was then tackled.  The placing. Or rather the discount price of the placing. The questioner noted that he saw the discount of 17% vs the last placing being at a 5% discount.  

The first point made was that this is a very different environment to that of the last placing. The brokers used undertook an exercise on recent discounts and that showed that they had occurred at similar discounts. It’s hard to argue with facts, but any self-interested broker could easily manipulate the figures just by adjusting the sample data.

Now the target is £750m, a fundraise became inevitable.  They had been clear that the last fundraise in 2017 was to get to the previous target.  As such, this should not be a surprise. The clue here was that when the target next goes up that will be a cue for another fundraise.

It then became a judgement as to when.  The board made the decision that they wanted to do it before 29th March.  This is a prudent decision as trying to time the market given the potential macro-economic scenarios, is not a risk the business should be taking. 

Whilst the decision had been made on timing, it was clear that there were a number of events which would work against a successful raise, namely:

  • Financial stocks are unloved – I don’t buy this one as a good story is a good story regardless of the sector.
  • Unhelpful headlines about banking participants – Again, not relevant to this story.
  • Size of company – The only pertinent point, possibly along with the timing being in the investee’s favour. 

They would have preferred a much tighter price, but took the view that they wanted the money at the price available.

He did believe that the uncertainty now was greater, so it could have been even more difficult to raise funds now. Debatable, but it is fair to say they made a judgement call on timing based on all the facts at the time and that cannot be criticised.

Finally, it was acknowledged there was a greater dilution and lower price than they would have liked.

Seventeen institutional investors were on the roadshow. Of which 50% had been seen before.  They did bring in some new names, but many chose not to invest.

Question about cost of raise being £500k and whether any success fees had been included in the fee structure.

It wasn’t structured that way and have never done in that way before.

Fundamentally, this demonstrated a naivety towards the operation of financial markets and the negotiability of pricing. It also undermines a previous point made about extensive experience of the board in financial markets. Being balanced though, it is easy to be dazzled by a City guy promising large amounts of cash.  However, as a shareholder I don’t want this to be a recurrence and it prompted two questions from me.

Have you considered a review of your brokers.

Pragmatic answer that PCF will take that suggestion on board.

Did you seek any independent advice on the process of the fundraise to potentially save costs and increase possible success.

Not thought about that before but again will take the suggestion on board and consider it for the future.

Question on the £750m target and has the target slipped by a year.

Got to £350m target early, but not going to bring £750m target forward by a year as a result.    They will not change the approach but they will bring in greater diversification as a part of growth.

Question about quality of communications in a sector where proven difficult to add shareholder value historically. In short the questioner wanted the company to give more specific guidance for numbers, i.e. he thought FY 2022 net income of £18m was achievable.

The Bloomberg consensus f/c net income for FY 2022 is 16.9m.

Polite response that they are careful about the message they put across.  Subtext, we’re not going to put numbers out to get hung out to dry on at a later date.

Question about 3 year target (£750m) and biggest challenges to the business now.

Credit risk – Economic conditions and collection of the book are their key risks.

He went on to talk about the different stresses that appear from different recessions, i.e. 1990s unemployment & high interest rates, whereas 2008/9 was about credit withdrawal for business. The key takeaway was that in 2008, if an individual kept their job, they may well have found themselves better off (so long as they had had a variable rate mortgage).

From 2009-2011, SME defaults were the big issue while consumer defaults were in many ways unaffected.

Therefore, the issue for PCF is what sort of recession is likely. His main pre-occupation was whether it would be a consumer- or business-led recession.

Follow up discussion with Scott Maybury

On the challenges of the fundraise

Whilst he didn’t specifically cite it in such a way, it was clear from my conversation with him that the sub-£100m market cap was the primary issue they faced.   In good markets a lot of the institutional investors will be flexible on this if it is a good story, but at the time they were doing the raise it was a rigid number for them. I mentioned a couple of major institutions e.g. Blackrock, M&G, and it was clear that a few of them refused a meeting. He was candid enough to say when they saw the final roadshow list and those weren’t on it, it was clear that it was going to be tough to get the placing done successfully.

This is factually correct.  £100m is often an arbitrary number below which institutional investors won’t take a meeting. However, it does prompt further questions about the story.  If the story was compelling at first glance then a meeting would result even if no investment followed.  The fact that no meetings were convened suggests either the broker did a poor job or that the story was not felt to be compelling by the individuals approached. This can only ever be speculated upon.  

It’s now clear that once £100m market cap is reached, that will be a very positive development and could be the catalyst for a further re-rating or a signal that a fundraise will become imminent. 

I asked about target CET ratio and how it compared to others, suggesting that it may well be too high.

They are in the 14-18% range. The PRA come in frequently to assess their model and give them the CET ratio to solve for. He said it will never be publicly stated what that is. I think it’s a fair assumption that it will be closer to 18% than 14%.

I wanted to ask a follow-up about the learning points, if any had been thought about, in the wake of the Metro Bank failings with regard to their model but didn’t get chance.

Along with another investor we discussed their broker choice and whether they were appropriate going forwards.

Scott had a pragmatic response that perhaps they weren’t the best broker. Again I felt a naivety about how they interacted with the City. I mentioned the possibility of a bigger bank/broker having a better global reach for potential investors.

I asked if they had thought about raising bond finance, specifically a Coco.

It is possible, but the PRA do set limits on that and he mentioned Upper Tier two as a potential source of funds.

Conclusion

I got a good sense from Scott Maybury that he was a considered Chief Executive and was on top of most of the issues within his business. He was humble about the size of the business and careful not to make any grandiose statements about its potential, yet clearly driven. His longevity in the role is a significant positive.

With the benefit of a City background, I can see how he can improve his interaction with the City to protect shareholder value going forwards. However, he seemed willing to take advice from a random shareholder like me, which made me walk away with a favourable impression of him and the business. I suspect that the placing discount will soon be forgotten and with operational success I will continue to champion this business as a shareholder.

 

At the time of publication, the author has a long position in PCF.

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  • comment-avatar

    Thanks for the AGM feedback Paul – some interesting and deep
    questioning by yourself and other attendees. 

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