Here's why City analysts aren't getting too excited about Provident Financial's soaring share price
Comment of the Day

October 13 2017

Commentary by Eoin Treacy

Here's why City analysts aren't getting too excited about Provident Financial's soaring share price

This article by Rebecca Smith for may be of interest to subscribers. Here is a section:

Meanwhile, Laith Khalaf, senior analyst at Hargreaves Lansdown, said the share price showing some relief "in these circumstances is natural", but said a "long rocky road" was ahead for the firm.

"The market clearly likes what it sees with the shares rising sharply," he said.

Khalaf added: "There are still reasons to be cautious though. Companies in recovery can go one of two ways, and the rewards, or losses, are usually high. Provident still doesn’t have a CEO, and the financial watchdog is investigating sales of its repayment option plan to Vanquis Bank customers, a product which looks a lot like PPI.

"Meanwhile the group’s credit rating is teetering on the edge of being downgraded to junk, a step down which would limit the availability of creditors, and push up the price of borrowing."

Eoin Treacy's view

Provident Financial was a leader in the fast and loose consumer credit market aimed at doorstep lending and has collapsed as its business model came under scrutiny. Quite whether it is capable of recovery is an open question but a lot of bad news has certainly been priced in. However, while Provident has been garnering headlines there is another area of the consumer credit market worthy of mention. 

Pawn brokers, as secured lenders, tend to do best when gold prices are trending higher and credit conditions are tightening so it is noteworthy that the sector is on a recovery trajectory internationally. 

In the UK H&T has been trending higher since 2013 and broke out of a yearlong range in September. While somewhat overbought in the short term, a sustained move below the trend mean would be required to question medium-term potential for additional upside. 

Meanwhile Morses Group, one of Provident’s largest competitors remains in a reasonably consistent uptrend. 

In the USA, FirstCash has staged an impressive rebound from its 2016 low and is now consolidating in the region of the 2013 peak. 

EZCorp rallied in 2016 to break a medium-term progression of lower rally highs and is now firming from the region of the trend mean.

In Australia, Cash Converters International broke a four-year downtrend in September. 

In Singapore, Valuemax Group moved to a new recovery high this week as it completes an almost two-year base. 

In Italy, Banca Sistema is testing the upper side of its base formation. 

The exceptions are Hong Kong listed pawn brokers which remain largely rangebound. 

On aggregate the return to performance of payday loans and secured lending with high interest payments suggests we may be seeing the first signs of credit beginning to tighten so it is a sector I will be monitoring. 


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