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Woodford 'hugely disappointed' as Provident crashes

Neil Woodford says Provident Financial will 'get back on track' as shares crash on FCA investigation, scrapping of dividend and departure of boss.

 
Woodford 'hugely disappointed' as Provident crashes

Update: Fund manager Neil Woodford has been left 'hugely disappointed' by a collapse in the shares of Provident Financial (PFG), but the fund manager has insisted the company will 'get back on track'.

Shares in the business plunged 67.3% to 574.7p, after the doorstep lender announced the departure of chief executive Peter Crook, scrapped its dividend and revealed an FCA investigation into its repayment option plan (ROP) product, as it delivered its second profit warning in two months.

That dealt a hammer blow to big investors in the stock like Woodford and fellow fund managers Mark Barnett and Alexander Darwall.

Woodford is among the company's biggest backers, with the stock the fourth largest holding in his £10.3 billion Woodford Equity Income fund at the end of June, accounting for 4.6% of the portfolio. It occupies 4% of his new and smaller Income Focus fund, and is also a top 10 position in £4.6 billion of funds run for financial advice group St James's Place (SJP).

Provident Financial said progress in its home credit division, where restructuring resulted in a profit warning in June, was 'too weak' and that it could incur losses of up to £120 million.

'The extent of this underperformance and the elongated period of time required to return the performance of the business to acceptable levels invalidates previous guidance,' it said.

Woodford backs recovery

Woodford (pictured) said he was 'hugely disappointed' by the deterioration in the home credit business but that he believed the business would 'ultimately get back on track'.

'This business has been around for more than a century and I believe it will be around for many decades to come,' he said.

He argued the market had over-reacted to today's news, claiming that even with conservative assumptions about the business, including a stabilisation of the consumer credit division with a smaller customer base, Provident Financial should still deliver more than £300 million of profit in 2019.

'This equates to approximately 160p in earnings per share in 2019, which at the time of writing represents a price / earnings ratio of around three times,' he said.

'If we assume the resumption of dividends with a 50% pay-out ratio, an 80p dividend would equate to around 15% dividend yield,' he added.

'I believe Provident Financial shares started the day undervalued, and have become even more so as a result of the market’s reaction to today’s news.'

Analysts question future

Provident Financial said its ROP product, sold by the Vanquis Bank division and responsible for £70 million of revenue a year, was under investigation by the FCA, with new sales suspended since April.

Numis analyst James Hamilton said ROP represented Provident Financial's version of payment protection insurance. 'Should they have to repay all the premiums as the banks have done it could question the viability of the group,' he said.

Provident Financial said that given the news it would withdraw the 43.2p interim dividend declared in July and due to be paid in November and said a final dividend, which last year amounted to 91.4p, was 'unlikely'.

The FCA is examining sales between April 2014 and 2016, although Shore Capital analyst Gary Greenwood said there was a risk the regulator could expand its investigation to cover earlier periods 'when penetration of the product was much higher'.

Peter Crook has resigned as chief executive following the news, with chairman Manjit Wolstenholme taking over the running of the business. She said it was critical to protect the group's Vanquis credit card division, Moneybarn car finance business and Satsuma short-term loans arm.

'My immediate priority is to lead the turnaround of the home credit business,' she said. 'Protecting the group's capital base through withdrawing the interim dividend and in all likelihood the full-year dividend is the appropriate response to maintain the highly valuable franchises of Vanquis Bank Moneybarn and Satsuma.'

Greenwood said Crook's departure was unlikely to be the only one. 'We expect that further heads will roll',' he said. 'This is without doubt a disaster for a company and a management team which, up until recent times, we regarded extremely highly,' he said, adding that a rights issue could not be ruled out.

Peel Hunt analyst Mark Williamson added the news could hit retail deposits. 'If Mr and Mrs Smith read about Provident's travails in the Daily Mail business section are they going to be content to leave their money with the Provi?' he said.

Big backers stung

Fund groups Invesco Perpetual and Woodford Investment Management between them own 40% of the company and have suffered respective losses of £377 million and £318 million this morning.

Woodford's successor at Invesco Perpetual, Mark Barnett (pictured) is another big backer, with the stock the sixth largest holding in both his £10.9 billion Invesco Perpetual High Income and £5.4 billion Income fund, accounting for 2.8% of both portfolios.

Barnett also holds 3.1% of the £1.8 billion Edinburgh (EDIN ) investment trust in the stock, with shares in the investment trust sliding 1.2% to 719.7p this morning on the news.

His £1.2 billion Perpetual Income & Growth (PIGT ) investment trust holds a 2.7% position, with shares in the trust falling 1.8% this morning.

But the highest conviction backer is Alexander Darwall, who holds 5.7% of his Jupiter European Opportunities (JEO ) investment trust in the stock. Shares in the trust are down 1.7% at 688.3p.

24 comments so far. Why not have your say?

PaulSh

Aug 22, 2017 at 16:37

Makes you wonder about so-called "actively-managed" funds/ITs when they still have large positions in a company that was clearly having some serious difficulties. And not that I'm a particular fan of trackers because I think on the whole they are dangerous for market stability, but it's things like this that make the argument for trackers even more persuasive because you get the same risk but lower costs.

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Meltonian

Aug 22, 2017 at 16:40

Changing an assured business model that prospered on the relationship between socially vulnerable borrowers and trusted local agents for one relying on shiny whizz kids with iPads suggests senior management have been led astray by highly qualified middle managers with some financial knowledge but neither skill nor experience of the business. It's the finance equivalent of the Poll Tax; anyone who knew the doorstep lending unsecured loan business would have said 'not on your life' or at least just try it in one town.

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Andrew Stevenson

Aug 22, 2017 at 16:44

I wonder whats happened to the obligatory 'star fund manager' that normally precedes his name ?

'departure of chief executive Peter Crook' Crook ?? You couldn't make it up !

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Ladysaver

Aug 22, 2017 at 17:46

I'm a little shaken to discover that so many well-thought-of fund managers backed Provident Financial. I have always felt queasy about its business model, and when I saw that Vanquis Bank was under its wing, I felt I'd rather not put savings into Vanquis, despite fairly attractive interest rates on offer. Yes, Provident Financial has been around for a long time, but its model is based on lending to people who cannot easily get credit any other way - because they may have trouble paying back. Haven't we heard somewhere before about the perils of this kind of lending?

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colin fellowes

Aug 22, 2017 at 17:54

Yes, this is not the only lemon Woodford has in his portfolios. I have read recently of other disappointing holdings in his Patient Capital fund. Perhaps his star is waning.

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Mark Yu

Aug 22, 2017 at 17:55

Gush, Woodford has got all the top five crasher today in his funds, they are sphr (-88%), pfg (-66%), halo (-26%), dddd (-15%), alm (-13%). That is some record for a star manager!

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Bestmate

Aug 22, 2017 at 19:20

@Ladysaver

Don't forget that Vanquis is fully protected and so unless the BoE goes bust you are safe. Indeed if the Old Lady of T. did go then all your money worries would disappear with her overnight. Money as we know it would be worthless. Your garden and it's potential for veg growing would take on a different perspective.

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Franco

Aug 22, 2017 at 21:18

Now we see why risk averse people prefer index funds over hyped up star managers' gambling implements. Who is next, Terry Smith?

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General Zod via mobile

Aug 22, 2017 at 21:36

Nice to see Neil Woodford get some media coverage for once. I swear I haven't read anything about his fund businesses in the financial press since at least yesterday.

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joseph o neill

Aug 22, 2017 at 22:03

Very surprised by Neil's expected forecast's of 160p in 2019. I'd be kidding not only myself but the investors who put their trust in me to deploy their capital, to forecast the impossible.

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Alex Peard

Aug 22, 2017 at 22:16

Huge questions over the effectiveness of the board in overseeing management.

The CEO and CFO were paid £10.5 million between them last year, I bet the CEO gets a big payoff! The CFO will also have to go in due course, he must (or should) have known how bad things were when they issued a warning last month.

Also only two of the non executive directors hold any shares in the company, not a sign of confidence in the business. This is the same as with the Carillion collapse recently. The Provident chairman was paid £320k last year, probably in a job out of her league.

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richard tomkin

Aug 22, 2017 at 22:21

Being a "high conviction backer",as I discovered at Newmarket last week,can seriously impact one's well-being.You do wonder how sensible it is having so many eggs in one basket,as some of these gents seem to have had.

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J Thomas

Aug 22, 2017 at 22:42

The only two share types I refuse to invest in are gambling and loan companies to vulnerable individuals. It would seem PFG are both. The only credit in their favour is they probably kept many individuals out of the clutches of criminal loan sharks.

However a business model which relies on customers whom the main banks refuse to give loans to will always be very risky. The securities of the customers dog being pregnant and the promise of puppies for sale in three months would hardly inspire confidence of ever getting the money repaid.

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albion

Aug 23, 2017 at 06:22

Two articles on Citywire's hero Woodford today. I wonder whether they are now going to drop the preceding 'star manager' before his name.

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Chiepirate via mobile

Aug 23, 2017 at 08:28

Glad sold Woodford IT after it hit 52 weeks high and was wobbly. This is heading down both on FA and TA

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what me, worry?

Aug 23, 2017 at 09:54

pfg had a simple business model local agents agreeing loans to local people who could not get or could not understand the credit terms elsewhere. Like the man from the pru they collected weekly/fortnightly and would be the best "risk advisors" for the company. having come from a background where most insurance/finance/catalogue companies had agents calling weekly I can honestly say thay it was the most honest way of ensuring people got what they wanted/needed without being overly ripped off. In the case of pfg they keep people out of the hands of loan sharks and, trust me, that is a very very good thing.

So after a hundred and something years of a well oiled perfectly functioning network based on people to people and a very simple business model .......... need I go on? Bring back the local agent (with or without an ipad) and within 12 months I guarantee that sales and collections will be back at 2017 levels.

It wasnt broke!!!

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what me, worry?

Aug 23, 2017 at 09:58

PS. For info,yes, I do own shares in pfg and yes i do invest with neil woodford.

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William Phillips

Aug 23, 2017 at 10:35

When Cattles went bust in 2009, Provi was left with a near-monopoly in doorstep lending. It has blown the advantage by killing off the old self-employed commission agents (cf industrial life assurance the Man From the Pru) and trying to convert them into the equivalent of self-driven cars with satnav, obeying orders from the Bradford high command.

In posher circles the former model was called relationship banking, i.e. the personal touch. The agent knew his customers well and could appraise risk. The new way relies on 'computer says yes/no'. Algorithmic credit scoring, predicted times when best to call and collect, resulting in too many wasted trips to empty houses when the electronic brain at HQ got it wrong.

Provi has quickly slid from 90% collections to an incredible 57%, meaning that almost half the money it is owed is not coming in- not primarily through defaults but due to its own automated inefficiency.

There is a wider warning here for any business that looks forward to when it can dispense with the human element and be worked by smart machines.

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what me, worry?

Aug 23, 2017 at 10:59

Completely agree WF it was always a people to people based business and its integrity relied entirely upon that fact. To use the up to date in the moment *jargonese " consumer biased, forward facing, interfaces".

*For jargonese read b******t.

Oh and the borrowers will have the money ready for the day the agent is due but it will be gone a day later if it has not been collected.

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Meltonian

Aug 23, 2017 at 11:20

Totally agree with wmw? and William Phillips. If we can see it why did they not? 90% collection rate in this market is brilliant, bearing in mind the margins; ask any credit union manager.

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agent via mobile

Aug 23, 2017 at 17:58

X agent of 30 years for provident to say that there was a shortfall in agents applying for the new way is not true their reasons for changes they said was the FCA told them to get their house in order all I can say they deserve everything that goes their way I hope the financial markets make them pay for the way they treated they all the x agents

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Dennis .

Aug 26, 2017 at 09:14

I pulled all of my money out of Woodford funds a couple of years ago when he became so obviously part of the HL marketing machine.

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Robert Morfee

Aug 26, 2017 at 09:46

From time to time as a solicitor I have found myself instructed by moneylenders charging high rates. I found it distasteful work. I don't invest in them - Provident Financial, Cattles, London Scottish have all been tipped at one time or another.

Their profits are dependent on the vulnerable and poor. Moreover, you are always at risk of the "extortionate bargain" defence in the Consumer Credit legislation.

I agree with Ladysaver - it's surprising that sensible investors can be so dependent on such a brittle business.

Robert Morfee

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Franco

Aug 26, 2017 at 12:46

What else can Woodford do now, but put on a brave face and say Provident will recover?

I am afraid like thousands of others, I did not bother to look beyond HL's hype when launching Woodford's funds and bought into his Equity Income fund. His performance in the last 10 years had been very poor and I should have seen it. But never again will I trust one word coming from HL.

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