The biggest strategic driver for CUI remains the potential for the GasPT product to...
Following the release of the 2017 full year results for the financial year to end September 2017 on the 5th December 2017, and ahead of the release of the 2017 annual report due on the 6th February 2018, we have updated our forecasts for profit and earnings for the period 2018e to 2020e.
PCF GROUP PLC (LON:PCF) gave market guidance that they expect to grow portfolio assets to £350m by financial year 2020 and to £750m by 2022. In addition, the group expects to deliver an ROE of 12.5% within 3 years (2017, 8.7% reported after costs) and an ROE of 17.5% in 5 years. Guidance for NIM (net interest margin) on portfolio assets is a target of 7 – 8% (2017, 8.3% reported). Previous guidance for ROAA (return on average assets) released with the 2017 interim results was for a 3 year medium term target of 2.5%.
We are confident of the Group’s aspiration for portfolio asset growth to £350m by 2020 and to £750m by 2022. Whilst relying to some extent on the UK macroeconomic and monetary environment between now and 2020/2022 and the asymmetric impact that could have on consumer and business finance markets, we see no particular reason why PCF specifically should be more exposed to any turndown compared to other firms. On the contrary, the strategic move towards greater prime market exposure should lessen any market impact in our view as the Group seeks greater prime market, and thus lower credit risk, share.
In our view, the strategic initiative to directly raise competitively priced funding from the retail, and potentially commercial, deposit markets enabling greater prime market exposure is a structural shift in capability which lowers credit risk and reduces more cyclical performances from lower credit grade lending. Prime credit performance should deliver more consistent and lower credit risk compared to lower credit grades, and, furthermore, the term retail deposit funding should lower the funding liquidity risk compared to the dependence on wholesale markets.
We see average portfolio assets rising to £315m in 2020e, in line with the end of year Group management forecast of £350m. Our estimates for NIM (based on average assets) in years 2018e – 2020e ranges between 8.1% and 8.3% driven by the considerable success in raising retail deposits. Annualised banking costs of £2m are fully expensed in each year, and we see further increases in administrative and group costs as regulatory, scale, organisation, and management of the Group increases with business success. Impairment losses on average portfolio assets rise back to c.1% of the net balance which allows for some increase in portfolio stress to be absorbed from the current low rate of 0.5%.
According to our estimates, PCF Group pre-tax profits will rise in each year to c.£10m by 2020 (2017 comparable basis, £3.6m) with EPS rising by roughly 1p per year to 3.84p. We were surprised with the level of dividend increase in 2017 of 90% to 1.9p per share. Our original estimate was driven by our appreciation of PCF as a growth business, one typified by a low dividend as the company retained earnings within the business to support growth. However, management have made it clear that they intend to adhere to the discipline of paying a dividend and sought to provide a more meaningful pay out and ratio in 2017. Our new estimates see DPS rise by a notional 10% pa from this new base, reflecting a more ordinary increase in subsequent years.
This decision to pay a more substantial dividend pay-out in 2017 does not exclude the potential longer term need for further capital, in our view. PCF may return to the market once initial growth to 2020 has been delivered and capital requirements fully understood in the context of the future business plans and potential portfolio asset acquisitions.
Looking to our estimates for 2018e and based on a 27p share price, we see PCF currently trading on a P/E ratio of 14.8x after tax EPS, and a DPS yield of <1%. Turning to 2020e we see the current P/E ratio fall to 7.0x after EPS and the DPS yield rise to c.1.0%.
The key risks, in our view, are as follows:
. Credit risk in the existing book and in new business.
. Macroeconomic risks to either aggregate demand and/or monetary policy in the UK.
. Competitive pressures from other market firms.
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