A profit warning, withdrawal of its dividend and resignation of its CEO has sent the Provident Financial (LSE: PFG) share price crashing downwards by 60%. The specialised lender has experienced hugely disappointing performance in its home credit division, and this has caused its overall performance as a business to suffer. Could this be a buying opportunity, or is it a stock to avoid right now?
A troubled period
The company’s home credit division has seen a number of significant changes in recent months. Notably, it switched from using self-employed agents to full-time Customer Experience Managers (CEMs). This was designed to improve the service levels offered to its customers, while also improving overall collections performance.
However, the result of the change has been substantial staffing issues, as well as a worsening in collections performance. Agent attrition has been higher than expected, while collections performance of 57% is down on the 90% level from the same period of the prior year. In fact, sales have been £9m lower per week compared with comparative weeks in 2016.
Response
The result of the poor performance of the company’s home credit sector has been to increase the anticipated pre-exceptional loss for the division. It is now forecast to post a loss of between £80m and £120m for the full year, which will impact negatively on the group’s profitability.
Such is the scale of the problems experienced in the home credit arena that Provident Financial has decided to withdraw the previously announced interim dividend. It is seeking to retain as much capital as possible, so a full-year dividend also seems unlikely. While the performance of the remainder of the business remains in line with expectations, it would be unsurprising for the home credit division to continue to struggle in the near term. This could mean further share price falls.
Looking ahead
Investor sentiment has come under severe pressure following the results, and this could continue for a prolonged period. The issues facing the home credit division are fundamental and it may take a considerable amount of time to fix them. A new CEO may be able to achieve this, but this could further extend the recovery period by a substantial amount.
Clearly, a recovery is possible. The remaining divisions of Provident Financial are still performing as expected. However, with the economic outlook for the UK being relatively uncertain and there being a possibility of higher interest rates, the lending sector may experience more challenging trading conditions. Inflation is also higher than wage growth, and this could lead to a higher default rate as consumers find servicing debt more difficult.
As such, now may not be the right time to buy the shares. However, the may be a worthwhile addition to a watchlist, with improved performance from the home credit division having the potential to act as a positive catalyst on the share price performance.
