Star manager Neil Woodford remains invested in Provident Financial after the stock plunged yesterday, arguing that the market over-reacted to bad news surrounding the lender.
Bradford-based Provident Financial, which specialising in lending to people in financial difficulties, fell more than 65 per cent yesterday following a surprise profit warning, the departure of its chief executive and the cancellation of its dividend.
The company is a top 10 holding in the £9.2bn CF Woodford Equity Income and £708.4m CF Woodford Income Focus funds. It is also owned by Invesco Perpetual High Income, Invesco Perpetual Income and Invesco Perpetual UK Strategic Income funds, which are managed by Mark Barnett.
Commenting on the stock’s fall, FE Alpha Manager Woodford said: “I’m not trying to dress this up as anything other than bad news – the company has given the market several reasons to be emotional. I do, however, believe it is critically important to maintain a disciplined, fundamentally-based perspective in my investment analysis. In all situations, it is vital that I do not let emotion influence my judgement.”
Performance of stock vs FTSE 100 over 3 months
Source: FE Analytics
In an unscheduled trading statement yesterday, Provident Financial announced that it now expects its consumer credit division to post a loss of between £80m and £120m during the current financial year.
This was the second profit warning for the division this year: in June it advised that profits for this part of the business would likely be around £60m, down from an earlier forecast of about £110m.
The issue relates to the roll-out of a new home credit operating model, which involves employing full-time ‘customer experience managers’ (CEMs) to serve customers rather than using self-employed agents.
The transition has been more difficult than expected and in yesterday’s update, Provident Financial revealed that debt collection rates for the division had fallen from 90 per cent in 2016 to 57 per cent currently – prompting the profit warning. 
Woodford (pictured) commented: “This is an extremely disappointing announcement today and I am surprised that the transition has failed so significantly.
“Importantly, this is not a credit quality problem – it is an operational issue which has been self-inflicted by the company. Credit quality across all of Provident’s divisions remains very good. Indeed, across the UK, I believe that credit trends are improving, as evidenced in the recent bank reporting season.”
In addition, it was announced that chief executive Peter Crook would step down with immediate effect with Manjit Wolstenholme assuming the role of executive chairman. The group also cancelled the interim dividend announced on 25 July 2017 in order to “protect its capital base and financial flexibility”; it is unlikely that a full-year dividend will be paid.
Meanwhile, the lender is facing a regulatory probe by the Financial Conduct Authority into the sale of a product that allowed people to freeze their credit card debt. The firm has paused selling the repayment option plan product offered by its Vanquis division and the FCA’s investigation is ongoing.
The statement added that the other Provident Financial divisions - Vanquis Bank, Moneybarn and Satsuma – continue to trade in line with management’s expectations. Overall, the company still expects to post a profit of at least £80m this year at a group level.
Woodford said that, bearing in mind the uncertainty of forecasts, Provident Financial should deliver pre-tax profit in excess of £300m in 2019 based on a smaller customer base for its consumer credit division and other “conservatively-struck assumptions” about the rest of the business.
This would equate to about 160p in earnings per share in 2019, representing a price/earnings ratio of around 3x at the moment. Assuming the resumption of dividends with a 50 per cent pay-out ratio, an 80p dividend see the stock with a 15 per cent dividend yield.
“These statistics illustrate the extent of the market’s over-reaction to [yesterday’s] news, in my view,” Woodford said. “With that in mind, I believe Provident Financial shares started the day undervalued, and have become even more so as a result of the market’s reaction to [the] news.
“I am hugely disappointed by what has happened to the consumer credit division but I continue to believe that it will ultimately get back on track (this business has been around for more than a century, by the way, and I believe it will be around for many decades to come). When it does so, Provident Financial’s share price deserves to be appreciably higher than it is today.”
The upset is one of several to strike Woodford’s portfolios in recent months, with prominent holdings such as Allied Minds, AstraZeneca, AA and Circassia being hit with negative news and sharp sell-offs.
CF Woodford Equity Income has made a 0.91 per cent loss since the start of the year, compared with a 7.50 per cent gain from the FTSE All Share and a 7.44 per cent return from the average IA UK Equity Income fund. This makes it the worst performing member of the peer group in 2017.
For the bulk of its track record, the fund had been the sector’s best performer since launch. However, its recent challenges mean it has dropped into the second quartile since inception with a 27.01 per cent total return,
Performance of fund vs sector and index since launch
Source: FE Analytics
In an update on the fund’s performance, Woodford Investment Management’s Mitchell Fraser-Jones touched on this and highlighted Woodford’s long-term approach, which has won the respect of the investment analyst community.
“Our long-term approach to investment management is encapsulated in a patient capital investment style. We look beyond market volatility and focus on the long-term fundamentals of businesses,” he said.
“This is always the case but particularly so over the past few weeks with, as many of you will be aware, several of our holdings including AstraZeneca, Provident Financial, AA, Theravance Biopharma, Prothena and Imperial Brands experiencing share price weakness.
“Neil’s underlying investment philosophy and strategy are underpinned by the analysis of the fundamentals of the macroeconomy and the individual companies in his investment universe. His investment anchor is to always focus on valuation.
“When markets lose sight of valuation discipline, as we believe they have done recently, there is always more risk and more opportunity. We seek to avoid the former and capitalise on the latter. It’s a hypothesis that we continually put to the test, questioning whether the businesses we are invested in are performing as we’d expect from a fundamental point of view, not a share price view.”
CF Woodford Equity Income has an ongoing charges figure (OCF) of 0.75 per cent and is yielding 3.49 per cent.