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Woodford & Barnett hit as Provident Financial plunges 70%

Woodford & Barnett hit as Provident Financial plunges 70%
Shares in Provident Financial (PFG) have collapsed, dealing a hammer blow to big backers Neil Woodford, Mark Barnett and Alexander Darwall, although Woodford is backing the stock to 'get back on track'.
 
The stock tumbled 71.04% to 508.3p after the doorstep lender announced the departure of chief executive Peter Crook, scrapped its dividend and revealed a Financial Conduct Authority (FCA) investigation into its repayment option plan (ROP) product, as it delivered its second profit warning in two months.
 

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.

The lender added that 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 last month 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.

The fund managers hit hardest

The news has delivered a major blow to big backers Invesco Perpetual and Woodford Investment Management who between them own 40% of the company and have suffered respective losses of £377 million and £318 million this morning.

The largest stake is owned by Neil Woodford's £10.3 billion Woodford Equity Income fund, with the stock the fourth largest holding 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).

Woodford branded the news 'disappointing', but said he believes the business will recover from the setback.

'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,' he said.

'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 and I believe it will be around for many decades to come.'

He said that assuming the consumer credit division stabilises, the group should still deliver pre-tax profit of over £300 million 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 3x. 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.

Woodford's successor at Invesco Perpetual, Mark Barnett, 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.

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