Provident Financial not quite 'out of the woods', Berenberg says

22nd Aug 2018 10:36

(Sharecast News) - Analysts at Berenberg warned that although profits were recovering at Provident Financial, the firm was not yet "out of the woods".Berenberg said there was still some way to go on the road to a full recovery in profits, with the difference between now and the average of those over the three years to 2016 driven by home credit.The broker had downgraded Provident to 'sell' earlier in the year, citing incoming regulations, slower growth coupled with margin pressures over at its credit card business and execution risks in its home credit wing as its reasoning.However, during the first half of the year, the FCA published several pieces of work on Provident's end-market and, now that the rules had been finalised, Berenberg saw them as not being quite as restrictive as anticipated, "substantially" reducing Provident's regulatory risk.While Berenberg noted that it continued to see risks to its estimates for the outsourcer, most notably its home credit recovery plan, which was running behind schedule, Provident's reduced exposure to regulatory risk was enough for the broker to upgrade the stock back to 'hold'.Berenberg also pointed out that while Vanquis', Provident's credit card arm, risk-adjusted margins had decreased, costs were still being tightly controlled, dropping to £99m from the £110m spent in the first half of 2017."Assuming Provident is able to achieve its financial targets and meet consensus expectations, it is trading in line with the sector. Therefore, rolling forwards our valuation to 2019E, yields a price target of 610.0p," Berenberg concluded.Previously, the broker had a 630.0p target for the shares.