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Cautious lending, steady progress

When we initiated coverage in Dec 20, comparing PCF to peers was difficult as most lenders have a 31 Dec year-end. It turns out that PCF is in an elite group that were able to maintain growth during FY20 and stay profitable.

Moreover, its recent trading update, five months into the financial year, has shown a continuing improvement in the loan repayment environment, although originations have been slowed by the introduction of a third lockdown and underwriting caution.

The share price has lagged peers, falling 30% from 1 Jan 20 (peer median -23%) and its recovery from the stock-market lows one year ago is far below the peer group’s top performers. There looks to be significant catch-up potential.

PCF has, quite correctly in our view, concentrated on writing high-quality, low-risk business with 93% of loan originations in FY21 being in the top four credit grades (100% in Feb), compared to 85% in FY20. The portfolio in forbearance has dropped from 38% in June 20 to below 5%, a good indicator of the portfolio’s quality.

YTD, originations total £104m (£270m for the full FY20), with the portfolio increasing to £440m from £434m on 30 Sep 20. While behind FY20 on run-rate, bear in mind that comparing the first 5 months of FY20 and FY21 is essentially a pre-pandemic to lockdown comparison. Seasonal factors and the UK’s continuing progress out of the pandemic should result in originations accelerating in H2.

Consumer loans are expected to bounce back strongly. Caravans and motorhomes (a niche market for PCF) should enjoy a particularly strong spring and summer as ‘local’ holidays replace international travel. H2 is also typically stronger for consumer car finance as H1 includes a Christmas lull. Lockdown easing should accelerate bridging property finance’s already strong growth trend. Short-term prospects for SME asset finance and Azule (broadcast and media equipment) are more muted.

That said, with PCF reporting £104m of originations for the first five months, it isn’t hard to multiply that up for the twelve-month period (even with a seasonal boost) and see they are unlikely to hit our FY21 origination forecast of £330m. On this basis they are also likely to fall short of our loan portfolio forecast of £553m. When we initiated back in December a third lockdown was not even on the cards. This has put the brakes on over a quarter of the year’s trading period.

Additionally, while loan repayment indicators such as forbearance levels improve, PCF’s accounting impairment charge will be subject to a degree of volatility at the moment. This charge is, in part, determined by financial models which use inputs such as forecast unemployment rate, CPI, and GDP- which are themselves volatile and subject to a high degree of uncertainty in the current environment.

With PCF taking a sensibly cautious approach to underwriting, and the continuing uncertainty around the pandemic and economic environments, we intend to update forecasts and our valuation when greater clarity emerges at the interim results in June.

Despite this uncertainty, our medium and long-term term outlook remains bullish. The business has positioned itself well for an exit from the pandemic, and recent high calibre appointments (Caroline Richardson, CFO and Garry Stran, COO) strengthen the team to deliver the growth plan of building a £1bn lending book.