Why Woodford stock Provident Financial just took off

This well-known consumer lender has bounced back from having a turbulent year. Graeme Evans assesses where the shares go from here.

After a dreadful year for Provident Financial and its shares, the sub-prime lender offered some reassurance today that it can repay the faith of fund manager Neil Woodford and other loyal investors.

Half-year results highlighted "good progress" in Provident’s mammoth restructuring job, while there’s no change in its promise to bring back a dividend payment for this year and a progressive policy thereafter.

The update brought relief for Provident shareholders, with the former FTSE 100 stock up 13% to nearly 700p after several months of sideways movement.

Shares had been changing hands at more than 2000p until former boss Peter Crook’s ill-fated plan to overhaul the lender's doorstep collection model by replacing self-employed agents with full-time staff. The restructuring backfired and the company also found itself the subject of two regulatory investigations.

The crisis led Provident to ask Woodford and other investors including Invesco to support a £300 million rights issue at a cut price of 315p. 

So far, new CEO Malcolm Le May has delivered on the promises made at the time of the March fundraising, with today's half-year underlying profits of £75 million meeting the expectations of City analysts.

The only major downside was the second quarter collections performance in home credit, which did not show the improvement the company expected. This was blamed on lower collections from customers who were signed up during the troubled migration to the new operating model last summer.

However, customers who took credit from Provident since then are performing in line with historic levels, indicating that changes to the business model are working. 

The Vanquis Bank division is performing in line with expectations, having made the changes required to meet new FCA rules addressing persistent debt. Provident added that it has now commenced a refund programme involving some 1.2 million Vanquis customers of its Repayment Option Plan.

It said provisions made in 2017 to cover this and a separate FCA investigation into Moneybarn, which provides car finance to about 46,000 consumers unable to get mainstream credit, remain appropriate.

Among other key announcements today, Provident has strengthened its board with the appointment of ex-Aviva boss Patrick Snowball as chairman and the recruitment of three new non-executive directors. It is also taking steps to bolster the group’s culture and governance.

These are still early days in the recovery plan, however, with much likely to depend on economic conditions and the appetite of consumers for taking on debt.

This is reflected in the continued caution of analysts, with JP Morgan Cazenove retaining its 750p target price today and Barclays edging up to 770p from 750p previously.

Provident has previously said it intends to have a dividend cover ratio of at least 1.4 times once the recovery plan in home credit has been delivered. This will be alongside maintaining a buffer over the group's revised minimum capital requirement for a CET 1 ratio of 25.5%.

This figure improved to 30% at the end of June, having fallen to below regulatory requirements, at 14.5%, by the end of 2017. 

The company is targeting a return on assets of around 10% per year alongside receivables growth of between 5% and 10% as the home credit business moves back to profitability in 2019. The division swung to a loss of £118.8 million in annual results.