PFG - Trading statement - 5% Yield and 10%+ growth forecast

Provident Financial plc, the leading UK non-standard lender, has issued the following update on trading for the financial year ended 31 December 2013, ahead of its preliminary results for the year which will be announced on 25 February 2014.

In this they reported that they expected to report figures for the full year in line with market expectations which they take to mean £197m pre exceptional pre tax profit. This is thanks to continued strong growth from their Vanquis Bank (credit cards in the main). While the Consumer Credit Division (CCD) continues to see weak demand and they continue to rationalise, modernise and shrink it ("focussing on returns" they say), while investing in the bank side (Satsuma on line weekly loans launched) and a credit card in Poland (around £8m cost incurred for 2013). On the funding while they have debts of around £1bn they suggest they have headroom in their facilities of £235m  which they say is sufficient to fund them through to their 2016 peak.

You might want to read the full announcment and check out their website for the investment case and download an interesting recent presentation about how they are moving towards being more of a bank and modernizing and improving the CCD side. 

On balance this is a stock I like based on its history of delivering Shareholder value under John Van Kuffeler, CEO in 1991 and Chairman since 1997. I do however note that he is about to be replaced by a lady accountant and former investment banker (a similar CV to Van Kuffeler's). PFG did really well in the 1990's, has struggled a bit in the 2000's and since de-merging its international side (International Personal Finance, IPF), which it grew from scratch by reinvesting cash flow from CCD in the UK. It has performed a bit better recently and seems to be in the process of growing another decent sized business on the back of the CCD cash flow again. While this type of business is not to every ones taste, I think they do provide a useful service to the lower end of the market. They are now also filling a gap left by the banks post their problems and are a possible beneficiary of any regulatory clamp down on pay day lenders.

The P/E is around average at 13 to 14 x but the yield is the main attraction with this one coming in at about 5% for this year and forecast to grow by 10% or more next year. The cover is thinner than I like normally but is in line with their distribution policy so I'm prepared to accept it but obviously means the growth may not materialise if they run into difficulties, but I note they did maintain the dividend into and through the credit crunch in 2008/9.

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