Chart of the week, Provident Financial and IFG Group: Financial Grime – 9 April 2018

News, views and unwavering opinion – even in the face of adversity – on the Speciality Financials sector.

Chart of the week

It’s no surprise there is some grumpiness with the regulators.  If you artificially distort markets that will create anomalies. As governments have distorted money markets by printing money the only answer to keep the resulting distortions under control is to regulate them.  Which is how communism works. Taxes increase to pay for the regulation until in the end all the animals are equal – as in George Orwell’s Animal Farm – except for the pigs who live in the farmhouse. 

This graph shows the problem to be dealt with which seems to be why there are so many people calling the top – it’s a little tricky to see how governments get out of this fix.

The part of the story that seems to be missing is that the cycle can only unwind as the asset side of the balance sheet grows, which is inflation. Which does seem to be coming.  It’s been a very long time coming.  But wage inflation is starting. This feeds spending.  The rush for assets over cash helps asset prices and company profits grow.  Profits in the UK’s FTSE 350 reached a record high in 2017.  UK sales climbed 20.8% last year among these companies and now the M&A frenzy is increasing as companies vie to own assets rather than maintaining their strong balance sheets.  Only banking saw lower revenue (the banking function has been taken over by central government).

So with profits set to climb on the back of inflation decreasing the value of cash I suspect we have yet to have the fireworks at the end of the party. Enough of the doom mongering. The AIM market reached a new record yesterday. The FTSE didn’t but I imagine it will.  The Tequila hasn’t come out yet.

Provident Financial – IMS  

• Share Price 642p
• Mkt Cap £1.63bn

IMS: Vanquis customer numbers are up 8% year on year to 1,723 with new customer booking in the quarter being down which we are assured is in line with management expectations. Impairments are stable.  CCD is reported to be “on track” to reach break-even on an annualised run rate basis in H2 2018, which is entirely a call on impairment rates. Collections we down to 70% from 78% in the previous quarter which we are assured is a seasonal move rather than indicative of the future.  Moneybarn grew customer numbers 24% but impairments have increased.  An extra £5m has been invested in central costs and the FCA investigation into affordability at Moneybarn is ongoing.

Estimates: PBT is expected to move from £174m in December 2018 to £240 in December 2019. Last year Vanquis produced £206m profit which is growing at 8%.  Which underlines the importance of Vanquis to the company.  This statement is unlikely to result in changes to estimates save the news of the £5m extra overhead.

Valuation: December 2019 ROE is expected to be 22% and the shares trade at 2.1X book value. PER is 9.6X.

Conclusion: Having written off the entire balance for customers who took out the ROP product we will never find out whether these customers were set to impair.  This leaves the pathway open to report reducing impairments at Vanquis for the rest of this year.  It will be January 19 before we find out if CCD has achieved break even as anticipated. So the shares are cheap and could rally until January 2019.  Perhaps there is a trade. But Morses Club will be a better investment.

IFG Group Plc – Trading Update  

• Share Price 157p
• Mkt Cap £165m

Q1: AUMA was almost flat in Q1 with AUMA of £30.5bn vs £30.6bn at December in line with other asset managers. James Hay reports a slowdown in new business which they believe is in line with other platforms where the slowdown in DB transfers and equity volatility has slowed new business. Saunderson House grew client numbers to 2.214 and AUM to £5,1bn (up 8% year on year), which is an average size of £2.3m.  The new team continues to undertake a review

Estimates: Estimates look for 27% PBT growth in the year to December 18 which in the light of modest Q1 year on year growth combined with extra costs due to the current review underway looks aggressive.

Valuation: PER is 13.5X and yield 1.3% on December 18 numbers. Net debt is expected to be £40m

Conclusion: Given the uncertainties around Elisium Fuels and the management review, the shares are too highly priced.

Jeremy Grime | jgrime@finncap.com