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Private & Commercial Finance Group plc

Private & Commercial Finance Group: a discount too far?

In the current days of the most severe recession to hit us in recent times business is challenging for everyone everywhere. It is easy to imagine that a small finance company would be finding the going particularly hard since the mounting cost and availability of funds is taking away whatever operating income is there.

The London-listed Private & Commercial Finance Group Plc (PCF) is an example of a small financier weathering the current storm. . The FSA-regulated independent finance company (capitalised at £3.3m) has just recently said that its six months trading figures (to 30th September), to be released 15th December, would not fall below expectations. Brokers are expecting a tangible upside on the earnings front, and hence have stuck a “buy” recommendation on the stock.

P&C provides finance products to consumers and businesses in the UK and operates two divisions. Consumer division provides financing of up to £50,000 for the purchase of cars and motorcycles. Business division provides leasing and hire purchase financing of up to £300,000 for business vehicles and equipment.

The Consumer Finance division wrote £23.9m worth of business in year ending 31.3.09. Portfolio of receivables stood at £63.9m spread over 12,546 customers. Business Finance division wrote £36.7m worth of business, with portfolio of receivables standing at £70.6m spread over 7,256 customers.

Given such thorough diversification and manageable default rates (current provision is at 5.9% of portfolio) P&C has recently been able to strengthen its balance sheet by recapitalisation. On 3rd August the company successfully raised almost £390k via placing of 10% convertible loan notes to redeem the notes that were due for repayment. On 2nd September P&C raised a further £1.35m via a share placing to retire still outstanding loan notes, as well as provide additional working capital. The exercise bolsters the balance sheet with some £150,000 worth of annual interest savings. Banks have been supportive all along by maintaining the Group’s debt facilities, although at higher fees and margins. 

Given such capital support and increasingly higher quality business coming through via brokers (the management estimates that at least half of its competition has been decimated by the recession) the company is confident of upside ahead.

P&C is financed by £6.8m of equity and £129.8m of debt (£2.4m of this being current). The company has £10m worth of committed, undrawn banking facilities. Debt to Equity ratio is 95% which is expected for a leveraged finance company. Weighted average cost of capital runs at around 10%.

Revenue for year ending 31.3.09 came in at £62.9m, 21.6% higher on the year before (business finance ticked up 55.20% of total revenue, with consumer finance accounting for the rest). However, negative fair value movement on derivative instruments, increased impairment charges, as well as reduction in income on sales of payment protection insurance have caused net income for the year 2009 to end up significantly lower compared to 2008. EPS for 2009 were 0.6 pence (3.6 pence for 2008).  

Total Assets on the balance sheet came to £140.5m at end of financial 2009 (£134.9m at end of 2008). The increase is mainly attributable to growth in receivables. Cash balance at 31.3.09 was £437,000. Liquidity is acceptable at current ratio of 1.26, assuming one takes into calculation the current debt level reported on the balance sheet. The management did, however, indicate in the notes to financial statements that £35m of the reported current debt had since been extended. This would make for a significantly improved liquidity.

The business utilised £3.2m of cash on operating activities and growing the portfolio at end of financial 2009 (£38.8m at end of 2008). The improved result is due to a lower increase in loans and receivables.

Given the sufficient capital provision, good loan portfolio diversification and improved operational efficiency (installed new portfolio management and accounting software,ICS) the current share price of 6.75 pence (well below the company’s book value) isn’t dishing out much credit to the company for surviving the worst financial crisis in living memory.
 
With Daniel Stewart reporting P&C’s net asset value at 17.8 pence a share and targeting the stock at 15 pence a share, the upside appears to be there for the taking.

Following the recent share issue, the largest shareholders are an equity fund through the Bank of New York Nominees (28.5%), Aberdeen Holdings represented by non-executive director Mr. F. Al-Yousef (10.2%) and Commerzbank AG (5.5%).

Trading figures for six months to 30th September are being put out on 15th December.