Whenever I invest in a company, the first thing I always consider is the quality and track record of its management. And that’s why I would buy Neil Woodford favourite Non-Standard Finance (LSE: NSF), but sell Provident Financial (LSE: PFG).
Backing management
Non-Standard and Provident are both similar businesses. They provide short term high-cost credit to customers who might have been shut off from traditional lenders.
For a long time, Provident was the leader in this field under the stewardship of former CEO John van Kuffeler. However, shortly after this transformational CEO left, the wheels started to come off. The new management tried to restructure the business by altering the way it collects outstanding credit. The result was chaos. Collections slumped from more than 70% to around 50%, and many employees left the business, taking their customers with them. Companies like Non-Standard benefitted from this exodus.
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And now Non-Standard, which is led by none other than John van Kuffeler, is trying to capitalise on its rival’s problems.
Unsolicited offer
Non-Standard has made an unsolicited £1.3bn offer for the group, which is supported by shareholders on both sides.
Neil Woodford and his former employer Invesco own the majority of both companies and they are pushing for the merger to go ahead. However, Provident is trying to de-rail van Kuffeler’s offer, and that’s why I’d sell Provident and invest £2k in Non-Standard today.
Provident is several times larger than Non-Standard and, if the deal completes, it will leave the former’s shareholders owning the majority of the company. This isn’t the perfect outcome, but I think combining the two groups is the right decision. Van Kuffeler’s record shows that he knows how to run a business like Provident, and run it well, so I think he’s the best candidate for the job.
On the other hand, Provident’s current management doesn’t seem to be cut out for the job. They’ve attacked Non-Standard’s offer, stating that it has “major strategic flaws, contains a number of misguided assumptions about the Provident business and includes future plans which we consider to be fraught with execution risk.”
Provident is also attacking Non-Standard’s share price performance. In a press release published today, Provident states “NSF’s share price has fallen on average 20% since its acquisitions and its share price has fallen 30% since it announced the issuance of new shares to acquire Everyday Loans.“
This may be true, but considering Provident’s own share price is down more than 81% over the past three years, the attack seems a bit petty.
The better buy
All of the above leads me to conclude that Non-Standard is the better buy for investors today.
The company might have underperformed over the past few months, but its experienced management team is worth backing, in my opinion. Van Kuffeler has an impressive track record of creating value for investors, and the combined Non-Standard/Provident should give him a stable platform to build on.
Even if the deal doesn’t go ahead, I think the outlook for Non-Standard is bright as the business continues to build on is successes (and Provident’s failures). Without the merger, analysts believe the firm’s revenue will double over the next two years. Over the same period, analysts are expecting Provident’s revenues to flatline.
