Provident Financial appoints new boss to home credit arm

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Today’s edition features:

  • CRH (CRH.L)
  • Dixons Carphone (DC..L)

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Markets

Europe
The FTSE-100 finished yesterday’s session 0.33% higher at 7,407.06 whilst the FTSE AIM All-Share index was up 0.18% at 1,004.98. In continental Europe, the CAC-40 finished little changed at 5,115.13 whilst the DAX was up 0.05% at 12,180.83.

Wall Street
In New York last night, the Dow Jones ended the day 0.13% lower at 21,783.40, the S&P-500 shed 0.21% to stand at 2,438.97 and the Nasdaq lost 0.11% to finish the session at 6,271.33.

Asia
In Asian markets this morning, the Nikkei 225 was recently up 0.51% at 19,452.61 and the Hang Seng was 1.07% higher at 27,813.79.

Oil
In early trade today, WTI crude was up 0.86% at $47.84 per barrel and Brent Crude was up 0.88% at $52.5 per barrel.


Headlines

Provident Financial appoints new boss to home credit arm
Troubled doorstep lender Provident Financial (PFG.L) has made a management change at its consumer credit division. The firm lost two-thirds of its share value on Tuesday after it issued its second profit warning in three months. Chris Gillespie has been appointed managing director of the home credit business, replacing Andy Parkinson. His task is to re-establish relationships with customers, bring collections back to a normal level and stabilise the operation of the company. The FTSE-100 company expects to make losses of £80m to £120m after its debt collection rates fell to 57%, compared with a 90% rate in 2016. Bradford-based Provident recently changed the way it collected its loans, replacing self-employed agents with “customer experience managers”. Chief executive Peter Crook resigned earlier this week. Manjit Wolstenholme, Provident Financial executive chair, said she was seeking to “turn the home credit business around and to putting a plan in place to deliver good results for the company”. The company has some 2.5 million customers, many of whom would not qualify for a standard bank loan and are therefore categorised as “sub-prime”.

Source: BBC News



Company news

CRH (CRH.L, 2,793.00p) – Buy
The international building materials group, yesterday announced its 2017 interim results along with two significant transactions as part of its continuing focus on growth and value creation through effective portfolio management and capital reallocation. The transactions comprise one divestment in the US and one acquisition in Europe. Key points from the results were that the H1 performance remained in line with April’s guidance; sales of €13.0 billion were 2% ahead of 2016, with the like-for-like figure ahead 1%; +3% in Europe, +1% in the Americas and down 8% in Asia. EBITDA came out at €1.175 billion, 5% ahead of the comparable, with the like-for-like itself ahead 2%; +2% in Europe, +6% in the Americas and down 39% in Asia. EPS of 43.5c per share was 29% ahead of 2016. The Board also decided to increase the interim dividend to 19.2c per share, an increase of 2.1% compared with last year’s level of 18.8c per share. Divestments and asset disposals during the period generated total profit on disposals of €45 million (H1 2016: €20 million) as the ongoing recycling of capital continues to be embedded in the business, leaving net debt at €6.4bn, although given that the Group agreed the US$2.6bn sale of its Americas Distribution business post period-end (in 2016 this business contributed c.5% of Group EBITDA) this will lead to a further reduction, offset by the acquisition of German based lime and aggregates business, Fels, for €0.6bn. Both transactions are subject to regulatory approval. Reviewing the period, the Board noted that the first half of 2017 saw stabilising trends in certain European markets and satisfactory growth in the Americas, which more than offset reduced activity in Asia due to a challenging market environment in the Philippines.

Our View: That’s a relief! As always, the international mix of contributions is important for CRH. Having underperformed the UK benchmark index since May this year, it appeared some investors were factoring in a more resounding overall hit on the Group’s half-year performance from the Asian slowdown. Concern here focussed on the Philippines where, despite strong market fundamentals with residential growth through urbanisation projects, stable flow of remittances from overseas workers and a high government infrastructure budget, major projects simply did not progress as quickly as expected in the first half of 2017. Elsewhere, the equity-accounted Chinese and Indian operations saw higher volumes and prices more than offset by higher energy costs and, as a result, operating profit was lower than the first half of 2016. It appears, however, that the net effect of these hits are being taken out of proportion, bearing in mind that for the period just reported the Division accounted for less than 3% of total Group EBITDA. Looking elsewhere around the Globe, however, while challenging conditions will continue through the second half, and despite currency headwinds, management still appears confident of another year of progress. This is because in Europe good momentum experienced in H1 is expected to continue, leading to second half EBITDA ahead of the comparative and, in the Americas, solid fundamentals are being maintained, with both residential and non-residential activity improving. In US infrastructure, funding stability provided by the FAST Act will lead to a positive trend in volumes for H2, so while offset somewhat by higher input costs, overall the region will be ahead once again in terms of EBITDA. On this basis, Beaufort has fractionally trimmed its current 2017E and 2018E forecasts to take account of an indicated current year forex headwind of around €75m more than previous expectations, which moves our pre-tax forecasts to €2,090m and €2,345m, leading to earnings per share of 179.0c and 199.0c. Price/earnings multiples of 16.7x and 15.0x is not expensive given the quality and geographical spread of the underlying operations, which are supported by yields of 2.1% and 2.2% respectively. Beaufort retains its Buy recommendation of CRH with a price target of 3,200p.

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Dixons Carphone (DC..L, 180.80p) – Hold
Dixons Carphone (‘Dixons’), the Europe’s leading specialist electrical and telecommunications retailer and services company, yesterday provided its trading update for the 13 weeks ended 29 July 2017 (‘Q1 FY2018’). During the period, revenue at a reported basis advanced by +6% and on a constant currency basis, it grew by +3%, against the comparative period (‘Q1 FY2017’). Group LFL revenue rose by +6%, comprised of UK & Ireland +4%, Nordics +8% and Greece +6%. The Group said electricals continued to perform well in the UK & Ireland, Nordics and Greece but UK mobile phone market have seen challenging conditions over the last few months. With regard to the Group’s Connected World Services (‘CWS’) division, it saw revenue down -24% and -25% on a reported and constant currency basis, respectively. The Group said it is expecting limited profits in FY2018 (FY2017: £213m) due to recent change in selling model of honeybee software product from upfront sales to a software-as-a-service. For the full year FY2018, the Group is estimating a net negative effect of one-off items in a range between £10m and £40m compared to a net positive effect of £71m last year, due largely to changes in EU roaming legislation. Overall, the management now expect to deliver FY2018E headline pre-tax profit in the range of £360m to £440m. The Group is scheduled to release its interim results on 13 December 2017.

Our View: Another day, another blue-chip disaster. Hard on the heels of Provident Financial and WPP, what Dixons Carphone’s Chief Executive Seb James, called a “relatively funny morning” saw Dixons Carphone shares plunged by -23% at the market close. Having experienced a more challenging than expected UK postpay mobile phone market during Q1, Dixons shocked investors with a profit warning for FY2018 suggesting it now expects headline pre-tax profit in the range of £360m to £440m (including one-off items) against £501m achieved last year. The UK mobile phone market has been quiet since FY2017 as weaker Sterling pushing up the price of premium handsets at a time when significant technical innovation has been lacking in newer models. The net result has been for people to hold on to their mobiles for, on average, 4 to 5 months longer than was being seen a couple of years back. More positively for Dixons, however, given that it is the UK leader in lease or postpay contracts, the increasingly cash-strapped consumer at least remains tied to the Group for an extended period and tends naturally to upgrade through these when existing arrangement comes up for renewal. The much-anticipated release of Apple’s iPhone 8 handset (expected mid-September), for example, may well trigger a reversal of the currently unfavourable trend, although just how long this might be sustained given relative disappointment with iPhone 7 is, of course, simply down to Apple. Dixon’s management take on this is relatively optimistic, suggesting during the analyst conference call that they see it possibly performing not as good as the ‘6’ but better than the ‘7’. Beaufort believes yesterday’s fall in the share price may well turn out to be something of an over-reaction, sufficient perhaps for some short-term recovery. This may be an opportunity for existing shareholders to average down their overall in-price. For new investors’ however, yesterday’s results exposed the extent of Dixons’ vulnerability to product developments and changing consumer buying patterns, over which it has little control. This, along with uncertainty regarding the long-term uptake of Honeybee, its pioneering digital platform that simplifies and streamlines the online sales process, now injects a level of overall investment risk which is possibly too high, especially given that the dividend is expected to decline in line with the Group’s dividend policy of 3x cover on headline pre-tax profit. The shares have fallen a long way over the past quarter and, following yesterday’s hit, even approached cross-over of its P/E multiple (FY2018E and FY2019E of 6.7x and 6.4x) and dividend yield (5.0% and 5.2%) which now represents a hefty discount to its most obvious peers. This may be cheap enough to encourage some investors to trade the volatility but, given a very obvious lowering of the Group’s perceived quality of earnings, Beaufort has decided to downgrade its recommendation from Hold to Buy.

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To read Beaufort’s full research archive click here

Compiled by:
Barry Gibb, Kazunaga Senga, Sheldon Modeland, Charles Long & Ben Maitland
(t) +44 (0) 207 382 8384
(e) info@beaufortsecurities.com


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Recommendations
During the three months to end-July 2017, the number of stocks on which Beaufort Securities published recommendations was 205, and the recommendations were as follows: Buy – 75; Speculative Buy – 107; Hold – 19; Sell – 1.

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