Timing is everything. Tempus recommended selling shares in Provident Financial only hours before the stock market opened on Tuesday when they plunged 66 per cent to a two-decade low. It was the worst one-day performance of a FTSE 100 company since Royal Bank of Scotland in 2009 and the third worst on record.
Despite the continuing problems with the restructuring of the doorstep-lending business, no one, other than the shell-shocked directors, would have realised the extent of the problems at the group’s home credit business until the board meeting on Monday evening.
A profit warning — the second in two months — a suspended dividend, the immediate departure of Peter Crook, its long-serving chief executive, and the disclosure of a Financial Conduct Authority investigation into a product sold by Provident’s Vanquis Bank business has ruptured already fragile investor confidence in the sub-prime lender.
With the shares trading at levels last seen in the mid-1990s and far from the £36.34 they peaked at in November 2015, investors are picking over the rubble to see whether they have been oversold or are facing another lurch lower. Amid a flurry of downgrades to forecasts yesterday, including one from JP Morgan Cazenove, Provident’s broker, the shares struggled to halt the decline, before rallying into the close.
The belated share price rebound underlined the extent of concerns over the shake-up of its doorstep business to questions about liquidity and funding. The future of a business that has been operating for more than a century is being called into question.
Despite Manjit Wolstenholme, who has taken over as executive chairwoman, withdrawing the interim dividend and, most likely, the full-year payment, the prospect of management launching emergency fundraising remains real.
At present, Ms Wolstenholme is holding the line, indicating that the moves protect Provident’s capital base and give it financial flexibility.
Provident extended its bank facilities at the end of January to £450 million and the headroom on its committed facilities was £204 million in June, but with a £120 million retail bond maturing in October and an estimated £230 million of retail deposits maturing by next June, analysts at Liberum forecast a funding shortfall of £73 million.
Provident is further hindered by an agreement between its Vanquis subsidiary and the Prudential Regulation Authority to halt dividends or engage in non-standard transactions without the PRA’s approval while it awaits the outcome of the FCA investigation into sales of the credit card add-on product. Vanquis contributed an estimated 68 per cent of shareholder distributions last year, meaning a return to paying a dividend is unlikely in the near term.
This ring-fencing and potential compensation could lead to a shortfall of liquidity. It is the FCA’s investigation and the suspension of new sales of the add-on product from last April that are among the uncertainties facing investors.
While the issue has been compared with payment protection insurance mis-selling, there is debate whether the FCA will force Provident to redress customers. Woodford, its second biggest investor, thinks not but Liberum’s worst-case scenario is a £140 million payment.
Those bottom fishing may be tempted by the shares which had been trading on an historic price-earnings ratio of three times last year’s profits but they are not for the faint hearted.
MY ADVICE Sell
WHY Despite the huge sell-off there remains significant business and regulatory uncertainty and risk of more horrors being discovered
Enquest
Perhaps Enquest was tempting fate. Its announcement of first oil from its Kraken field in the North Sea at the end of June, on time and under budget, came complete with gushing endorsements from the government and the oil and gas authority.
Two months on, pride was followed by a 9 per cent fall in Enquest’s share price yesterday after problems boosting production from Kraken forced it to slash its outlook.
Enquest had been forecasting total production of between 45,000 and 51,000 barrels per day this year but yesterday cut that to about 37,000.
Kraken involves a complex system to separate the “heavy” oil from water. That system is not working as it should and keeps tripping. Production has been on and off and has yet to exceed 15,000 bpd; it was supposed to be nearing 30,000 by now. Enquest says it expects to resolve the problems this year and be on track for 50,000 bpd next year. It also says the wells it has drilled have performed better than expected.
The delay matters, though, because Enquest, which went through a painful debt restructuring last year, is nursing a $1.9 billion debt pile. With oil prices only about $50 a barrel, and production costs of between $21 and $25 a barrel, Victoria McCulloch of RBC Capital Markets estimates that Enquest is unable to cover its spending from free cashflow.
It has $68 million cash but risks having to eat into the remaining $145 million debt headroom on its main $1.2 billion revolving credit facility. The lower production outlook from Kraken, meanwhile, implies lower revenues and earnings.
The result? “Their covenants now look under threat,” Ms McCulloch argues. Enquest’s revolving credit facility borrowing limit is due to fall to 2.25 times at the year end. If cash and debt levels remained unchanged, it would need ebitda of about $430 million to avoid breaching covenants; that now looks ambitious.
The company will seek to reassure on its balance sheet when it reports half-year results on September 7 but admitted yesterday that the oil price and Kraken start-up pace would determine whether it would “need to have a discussion with banks” later in the year.
MY ADVICE Sell
WHY Kraken’s slow awakening brings covenants into question
