A case of credit where it is due

Whatever the woes its twin International Personal Finance may be suffering in Poland, Provident Financial is seeing all its own numbers heading in the right direction.

The international side went its own way in 2007; Provident Financial as a company has been running since 1880 and has been profitable throughout.

The business is now dominated by Vanquis Bank, its credit card side, having expanded this quickly to meet demand from customers whose credit records or other criteria do not allow them to approach other lenders, in keeping with the switch in consumer patterns towards plastic. There are plans to move this further towards the prime end of the market, more into the space occupied by Barclaycard and Capital One. Vanquis continues to increase customer numbers, with growth in new accounts in the fourth quarter ahead of the same time last year.

The picture is a bit different at the consumer credit division, the traditional doorstep lending business. Here Provident had decided to shrink the business, focusing on a smaller but more reliable loans book. This meant lower receivables but fewer bad debts in due course. It did mean the number of customers fell from 900,000 at the start of the year to something more than 800,000 at the end of it, although collections stabilised at a lower level in the second half. The Satsuma online debt venture cut start-up losses by £12 million and should be into a profit in 2017. Moneybarn, which lends for second-hand cars, suffered the usual seasonal slowdown in the fourth quarter.

Provident Financial expects to meet market expectations in the current financial year. Estimates for the year by Gary Greenwood, analyst at Shore Capital Markets, indicate how dominant Vanquis is. He expects it to contribute £204.8 million at the pre-tax level, against £116.5 million from the consumer credit division and £29.5 million from Moneybarn.

Provident Financial shares fell 30p to £28.36 yesterday. They were hit badly after the Brexit vote; management did at least indicate their confidence in the business by buying shares then. The shares sell on about 15 times’ 2017 earnings and yield about 5 per cent. Worth it in the long term.

WHY The rating is a high one and the shares are at a premium to other specialist lenders, but the strong market share looks unassailable

Mears Group
For an indication of exactly what is going wrong with our social care system, you have only to look at the experience of Mears.

Most of the business is in the care and maintenance of social housing and this side is doing well enough. The company is also involved in social care on behalf of local authorities and it has decided to reduce this by walking away from 15 contracts that were insufficiently profitable, taking write-offs as a consequence. This process is pretty well complete. The close-of-year trading update warned that care remained challenging, with the biggest constraint the hiring of high-quality care workers. Plainly, there is a long-term future for that side of the business, given demographic trends, but companies such as Mears are going to have to be more discriminating in future.

There are few such constraints in social housing, which started on a record number of new contracts last year and has a good pipeline of new bids. One of the advantages of this type of work is the good forward visibility because these are long-term contracts and Mears reckons to have 93 per cent of this year’s expected revenues and 82 per cent of the next in sight.

The refocusing in care services and the absence of writedowns will mean a decent rebound in profits in the current financial year. Mears shares, up 4¼p at 460¼p, sell on 12 times’ earnings, though the dividend yield of 2.8 per cent is not much to shout about. Worth it for those long-term prospects. Probably up with events.

WHY Upside looks limited if hard work at care is done

Cairn Energy
This is a crucial year for Cairn Energy, delivering the first production from the Catcher and Kraken fields in the North Sea, in which it has minority stakes. This is the first oil that Cairn has produced since its Indian venture, now hived off into Cairn India, in which the company has about 10 per cent.

There is further testing to do in Senegal. The field there is viable with estimated reserves of 274 million barrels, but favourable results from the fifth and sixth wells drilled could indicate there might be as much as ten times more, if most optimistic estimates are right.

Cairn has cash reserves of $335 million. To this can be added an estimated $300 million of cashflow from those two North Sea assets. The company does not have the cash constraints that others in the sector labour under and will have no problem taking Senegal further.

Then there is the seemingly endless dispute with the Indian authorities over Cairn India. Any progress on this front would be a further upside. Cairn, therefore, is hard to value at this stage, but the shares, up 1½p at 243p, are probably worth a speculative punt.

WHY Highly speculative, but this year is crucial to Cairn

And finally…
Mariana Resources is a miner with assets in several South American countries, but the main interest for investors is its 30 per cent interest in the Hot Maden gold and copper mine in northeast Turkey. The company has just published an independent asessment suggesting the mine is worth $1.37 billion, with total spending to bring it to production of $261 million, and capable of producing 2.6 million ounces of gold. Mariana expects a payback period of 2.1 years and an internal rate of return of 153 per cent.