Troubled International Personal Finance (LSE: IPF) updated the market today about trading during its third quarter to 30 September. A string of operational challenges have pummelled the share price, and today’s 197p is around 70% lower than it was four years ago.
The sub-prime lender operates in Poland, the Czech Republic, Estonia, Latvia, Poland, Spain, Mexico and Australia, but is winding down operations in Slovakia and Lithuania. Overall, the firm’s geographic footprint is shaping up as an uncomfortable place to be, because regulatory changes and pressures are attacking the business.
Trouble in Poland
In Poland, for example, which is one of the firm’s largest markets, the government’s council of ministers recently approved a comprehensive set of changes to Polish corporate income tax, which looks set to increase the tax payable by International Personal Finance because of the disallowance of tax deductions for expenses linked to “certain intra-group transactions.”
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The directors reckon they are making the case for “appropriate modification” but they are also looking for ways to change the firm’s operations in Poland to “mitigate the impact of this proposed legislation.” To me, the situation sounds grim. But regulatory issues are biting in Romania as well, and the firm faces “intense” competition in the Czech Republic.
Earnings look set to fall off a cliff this year, down almost 70%, with a small rebound of 6% or so next year, but we could argue that the news is in the price. At today’s share price around 198p, the forward price-to-earnings (P/E) ratio sits at just over 6 for 2018 and the forward dividend yield at more than 6%. The stock looks cheap, but I think it needs to be and I’m not tempted. Instead, I’d rather look at outperforming stock The Sage Group (LSE: SGE), which has been delighting investors for some time.
Steady performance
Sage has a long record of earnings and dividend growth, and the share price is more than 380% higher than it was nine years ago. The firm’s integrated accounting, payroll and payments solutions continue to find demand from businesses of all shapes and sizes around the world and City analysts think earnings will lift another 7% for the year to September 2018. And that’s what we’ve become used to, earnings grinding upwards, not spectacularly, but inexorably.
I keep thinking that Sage is bound to slip up at some point, but there’s no sign of that happening and in the most recent update during July the directors talked about ongoing operational momentum. Meanwhile, today’s share price around 730p throws out a forward P/E ratio just over 22 for the year to September 2018 and the forward dividend yield runs at almost 2.4%. Those forward earnings should cover the payment nearly twice.
It seems that many have noticed Sage’s performance because the valuation looks quite full. Nevertheless, I think the firm runs a quality business with defensive characteristics. Once hooked into using the firm’s products, customers face significant costs and operational disruption if they decide to switch to another supplier and I think that tends to make Sage’s customers loyal, which leads to steady incoming cash flow. I’d rather take my chances with Sage than with International Personal Finance.
