Provident Financial a buy 'for the brave', says Numis

Subprime lender Provident Financial is a 'buy' "for the brave" at the current price, according to Numis, after its shares tanked 66% on Tuesday on the back of a quadruple whammy of bad news.

The company issued its second profit warning in two months, withdrew its dividend, announced the departure of its CEO and revealed an FCA investigation into Vanquis Bank.

However, Numis reckons both the home credit division and Vanquis should be able to make a sustainably attractive return on equity and, assuming, the solvency of the business isn't called into question, the shares are attractive.

"We doubt there will be much in the way of good news in the short term and given the risks our cost of equity has increased materially. For the brave, Provident is a buy at this price, valued at a historic PE (not that we expect earnings to recover to the 2016 number in the near future, they could recover to this level over a few years) of just 3x."

In an unscheduled trading update on Tuesday, Provident said it now expects to make a pre-exceptional loss of between £80m and £120m in the home credit division as debt collection rates have fallen to 57% versus 90% in 2016, while sales were around £9m per week lower than the comparative weeks last year.

Back in June, the company said it expected the consumer credit division to generate a reduced pre-exceptional profit before tax of around £60m as it transitioned to a fully employed agent model.

Provident Financial also announced that Vanquis Bank was cooperating with an investigation by the FCA into the repayment option plan ancillary product. ROP currently contributes gross revenues, before impairment and costs, of approximately £70m per annum.

In light of the "substantial deterioration" in the trading performance of the home credit business and uncertainty created by the FCA's investigation at Vanquis, Provident said it was withdrawing the interim dividend declared in July and a full-year dividend is unlikely in order to protect its capital base.

Numis, which had previously suspended its rating on Provident, set a target price of 690p on the stock.

At 1045 BST, the shares were up 2.4% to 585p.