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.