The Provident Financial (LSE: PFG) share price is down by nearly 10% as I write, after the company reported a £113.5m loss for 2020 and said it would exit its door-to-door lending business.
Although Provident shares have risen by 40% over the last 12 months, the stock is down by 30% since the start of this year. I’m wondering whether this could be an opportunity for me to buy in to this well-established business at a bargain price.
Doorstep lending is over
Provident Financial’s consumer credit division (CCD) has been operating for more than 100 years. This business provides high-cost loans that are collected by door-to-door agents. This business will now be run-off or sold. This decision is being made against the backdrop of a wave of claims from current and former customers alleging “irresponsible lending”.
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The numbers involved are quite large — Provident set aside £23.4m to address claims last year and is trying to win approval to cap future claims at £50m, plus costs. I think the company is right to exit this business, which lost £75m last year.
The exit process has already started. Customers numbers in CCD fell from 522,000 to 311,000 last year. This was due to a reduction in new lending and higher write-offs due to Covid-19.
However, getting out of this business completely won’t be cheap. Provident’s management expects to spend around £100m exiting the CCD business, even if it’s sold.
For me to buy PFG shares at the current price, the group’s remaining operations will need to look much healthier than CCD. Fortunately, I think they do.
Modern products have profit potential
Provident Financial plans to focus on three main products in the future. These are credit cards, unsecured loans, and motor finance. Provident is already active in these areas, through its Vanquis Bank and Moneybarn operations.
Although the company will continue to focus on the bad credit segment of the market, management says it will target “sub- and near-prime segments”. Borrowing costs will be much lower than they were for doorstep loans, but my understanding is that lending criteria are tougher.
Covid-19 caused an increase in bad debts and a drop in new lending last year. Vanquis and Moneybarn both remained profitable despite these pressures, generating a combined pre-tax profit of £49m, down from £195m in 2019.
Provident Financial share price: my decision
I reckon that Provident’s remaining businesses will probably be successful on their own. What worries me is the uncertain cost of exiting the CCD operation. I can’t see anyone queuing up to buy this, except at a knock-down price.
I tend to avoid investing in situations where there are legal complications and large, uncertain future costs. As an outside investor, I can’t measure the risks accurately. This makes it hard to value the business.
At a share price of 235p, I reckon Provident Financial might turn out to be cheap. Or it might not. I don’t know.
On balance, I don’t think the shares are cheap enough to reflect the risk of further problems. I’ll be steering clear until it resolves some of its current issues.
