Virgin Money has made a dramatic recovery since the panicky days of early July, when it was seen as one of the most vulnerable companies to a hard Brexit and was thumped. The shares have bounced by more than 50 per cent in three months.
Yesterday’s third-quarter figures underline exactly why investors lap up Virgin in good times, but also why they tend to dump the shares at the first sign of economic trouble: the company is an energetic credit machine.
Credit card balances surged by 41 per cent, while net mortgage lending was up by 33 per cent. This is a lively pace of lending expansion by any measure. Virgin is snaffling market share at a rate of knots; the question is whether it is doing so at the expense of prudence.
Actually, the nine-month figures slightly exaggerate the pace of growth. Virgin has tightened up its credit card scoring criteria. Jayne-Anne Gadhia, chief executive, says she is now accepting only four out of every five applicants who previously would have passed muster.
Yet this appears to be only a temporary easing back on the throttle. She is sticking with her plan to build credit card balances to £3 billion by the end of next year. A Man United fan, she also has hopes of building an affinity card division after a successful start to a tie-up with the Reds this summer.
Meanwhile, new borrowers are being offered the incentive of 41 months of free credit when they sign up, hardly the action of a credit provider battening down the hatches.
In the past Virgin has done OK when recession-induced joblessness pushes up defaults, but these unsecured debts are very hard to collect. Virgin prefers to take an immediate haircut by selling them on to debt collection agencies.
Like all banks, Virgin has been hit by the cut in base rate, which narrows the spread between lending rates and deposit rates because the latter can’t be cut much further as they approach zero. Virgin reckons that the cost will be a manageable £5 million this year.
Virgin, at 320p yesterday, trades on just over ten times’ expected full-year profits, while yielding a prospective 1.6 per cent. The July share price plunge showed what can happen if investors fear a recession. The risk of a similar dose of collywobbles, or worse, during the next couple of years is all too real as policymakers grapple with the realpolitik of leaving the EU.
My advice Sell
Why A potent force in cards, but it looks vulnerable to Brexit stumbles
Moneysupermarket
Third-quarter figures from Moneysupermarket yesterday were not quite “epic”, to use the price comparison website company’s slogan, but they were pretty good for all that. Revenue growth accelerated to 12 per cent in the third quarter, boosted by stronger revenues in insurance and a standout performance in energy switching, thanks to a bulk switch of 160,000 households orchestrated by the in-house MoneySavingExpert division.
Revenue growth ground to a halt in the money division and is now negative: interest rates are so low that banks don’t feel it’s worth promoting savings products. The travel division was also weak because Britons stayed at home this year.
Even so, the company is still on track to meet full-year profit expectations. After the 10 per cent surge in the shares to 289p yesterday, they trade on more than 18 times’ earnings and yield 3.4 per cent.
Yet there may be bumps ahead: the chief executive, Peter Plumb, is making way for a new broom, Mark Lewis, after Christmas; an official competition investigation into price comparison is under way; and two rivals, the CompareTheMarket owner BGL and eSure’s Go Compare, are planning floats, which could lead some investors to defect.
My advice Hold
Why Change of boss and investigation suggest caution
Conviviality
If there’s one thing relatively resilient to any economic outcome, it’s grog. Perhaps that’s why Conviviality, a rapidly expanding cocktail of drinks wholesalers and retailers, seems to be hitting the spot with investors.
Floated at 100p in 2013, when it owned little more than Bargain Booze shops, it has expanded through acquisition, buying Wine Rack, Matthew Clark, Bibendum PLB and other alcohol companies. It raised fresh money in placings at 150p and 205p and so far has avoided the cardinal sin of leaving new investors nursing early losses. The shares rose 5 per cent to 214p yesterday on the back of a reassuring trading statement.
It’s hard to come up with consistent comparisons because of those acquisitions, but the AIM-listed company says that each of its divisions is delivering sales growth. The biggest, Conviviality Direct, now supplies 23,000 hotels, pubs and restaurants and reported a 5.2 per cent lift in sales in the six months to October. The retail division posted 2.5 per cent growth, though this was partly thanks to new store openings. Like-for-like sales fell by 1.7 per cent. The third division, Conviviality Trading, a mishmash of other suppliers, claimed sales growth of 5.1 per cent. If Diana Hunter, the chief executive, succeeds in integrating the disparate businesses, the rewards could be substantial.
The shares yield a prospective 5.8 per cent and trade on just ten times’ forecast profits. Worth a small glug if you’re a gambler.
My advice Buy
Why Cheap valuation, generous yield and scope for more consolidation deals
And finally . . .
What’s the true price of Biffa, the rubbish collection business floated two weeks ago? Goodness knows. Its broker is allowed to intervene to prop up the share price for up to 30 days after listing. This Citi has been doing, but there’s an unfortunate disclosure delay. Thus yesterday it reported it had bought more than 400,000 Biffa shares in more than 80 parcels nine days ago. Timely, it ain’t. The shares are languishing 5p below the slashed 180p float price. Who knows where they’d be without Citi’s massaging.
