Neil Woodford is “hugely disappointed” by Provident Financial issuing its second profit warning in three months and cancelling its interim dividend, but is confident the sub-prime lender’s share price will be “appreciably higher than it is today”.
Provident Financial shed two thirds of its stock market value on Tuesday following the news, when it was also announced that the FCA is investigating the sale of a repayment option plan by its Vanquis Bank credit card business. CEO Peter Crook resigned with immediate effect.
At close of trading Provident Financial’s share price was down 68 per cent with shares trading at 571p, compared to £31 three months ago. Around £1.7bn was wiped off the firm’s stock market value.
The doorstop lender anticipates losses of between £80m and £120m on the back of a drop in debt collection rates – which are down to 57 per cent from 90 per cent last year – following a switch from self-employed sales agents to using a more tech-reliant full-time sales force.
Despite Woodford’s 18 per cent holding in Provident Financial dropping in value from £300m to £168m, the manager remains bullish on the outlook for the firm, saying the parent group is “still expected to post a profit at the group level of at least £80m this year”.
Woodford says: “Looking into next year, there is still a lot of uncertainty around forecasts but if we assume some stabilisation in the consumer credit division with a smaller customer base, along with other conservatively-struck assumptions about the rest of the business, the group should deliver pre-tax profit in excess of £300m in 2019.
“This equates to approximately 160p in earnings per share in 2019, which at the time of writing represents a price/earnings ratio of around 3x. If we assume the resumption of dividends with a 50 per cent pay-out ratio, an 80p dividend would equate to around 15 per cent dividend yield.”
Woodford adds that while Provident Financial has “given the market several reasons to be emotional” it is “critically important to maintain a disciplined, fundamentally-based perspective”.
“In all situations, it is vital that I do not let emotion influence my judgement,” Woodford says. “With that in mind, I believe Provident Financial shares started the day undervalued, and have become even more so as a result of the market’s reaction to today’s news.
“I am hugely disappointed by what has happened to the consumer credit division but I continue to believe that it will, ultimately get back on track. When it does so, Provident Financial’s share price deserves to be appreciably higher than it is today.”
Several of Woodford’s holdings have been under the cosh recently, with AstraZeneca, AA, Theravance Biopharma, Prothena and Imperial Brands all experiencing share price weakness. However Woodford says the share prices of all of the companies “are sitting way below their fundamental value”.
“This is not to say that there aren’t challenges ahead,” Woodford IM’s head of communications Mitchell Fraser-Jones says. “But we are not bearish. In fact, we are incredibly confident about the long-term outlook for the fund from here. The fund’s strategy remains intact and we believe will deliver very attractive returns as it becomes increasingly clear that the underlying performance of the UK economy is both robust and improving.”