We explain what’s going on and reveal the views of several investment experts
Thursday 17 May 2018 Author: David Stevenson

When Provident Financial (PFG) lost 70% of its value last August, it was the biggest one day fall in FTSE 100 history.

In a strange event for the-now FTSE 250 company, its value soared by 70% on 27 February 2018 when the company revealed its Financial Conduct Authority (FCA) fines were not as high as expected.

Since then, its shares have been moving wildly up and down. So why are the shares continuing to behave in an erratic fashion?

The root of Provident’s spectacular fall from grace was the changes made to its home credit business. Its decision to replace self-employed debt collectors with fewer ‘customer experience managers’ did not go down well. Its 2017 results showed a £117m loss for the division, compared to a £115m profit for 2016.

The company’s £331m rights issue announced in February 2018 was less than the £500m thought to be needed to repair the balance sheet and compensate customers over the Vanquish repayment option plan.

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Provident needed £170m to compensate its customers plus a £2m fine to the FCA itself. More cash was also used to pay off its Moneybarn liabilities, a division which had also been under investigation by the FCA.

The rest of the money, about £108m, was used to shore up the company’s funding gap which puts it on a much surer footing than it had been previously.

Liberum analyst Portia Patel says the group can now focus on recovery as the two risks (FCA investigation and lack of funding) have been ‘neutralised’. Provident says it will also reinstate its dividend this year after scrapping payments in 2017.

The company’s recent trading update said its home credit business was recovering well but not everyone is sure that Provident Financial is out of the woods just yet.

Donald Tait, analyst at investment bank Berenberg, says there remain risks to earnings forecasts from the company’s Vanquish and Moneybarn divisions. These are the company’s credit card and motor finance segments respectively.

He is also concerned that growth at Vanquish may not outpace margin contraction and also sees execution risk in the home credit business.

Rupert Rucker, head of income solutions at Schroders, recently invested in Provident for Schroder Income Maximiser Fund (GB00B0HWJ904) saying the company has a robust balance sheet and he thinks the business will recover.

Analysts are also divided on whether the shares are worth buying at current levels. There are five ‘buy’ ratings, seven at ‘hold’ and one ‘sell’ rating, according to Reuters database. Three months ago the figures were the same apart from there were three ‘sell’ ratings, which suggests two analysts have since discontinued coverage.

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