Share Review: International Personal Finance (LON:IPF)

The recent jump in the share price in the last week of International Personal Finance (IPF) means that this share has crashed through the barrier of a 25% gain. It’s now time to take a closer look to help decide what future action to take.

The original rationale for acquisition was simple. I acquired the shares on 12 December 2016 after the shares plunged from 286p after the bad news that a cap on credit was to be introduced in countries where the firm operates, and the Ministry of Justice in Poland opening an investigation on prior years of business, potentially leaving the company open to a claim of underpaid tax. The share price tanked to 166p, and I picked up 593 of them. 

My first impression was that the drop was overdone. The firm specialises in unsecured, sub-prime lending, which always will be subject to poor public perception and possible government intervention. These products will always be in demand, and this segment will always exist in the free market, because the interest rate is pegged to the risk lenders take. Therefore a government abolishing this type of loan altogether may create more problems than it solves, as mainstream lenders will continue to snub the sub-prime market.

There were other factors; the first that IPF was profitable, and in fact had a decent track record:

Additionally, the affected countries did not make up a large part of the company portfolio; it was well diversified in a range of products, in a range of countries. The bad news would certainly make a difference to profits, but this was a solid enough product with a decent operating margin of c.15%.

Fundamentally, there were also other factors to like this share. There was a solid record of dividend growth, and that dividend was well covered by profits. At 12.4p the yield at the time was something like 7.4% and despite a poor year this looked a good bet to be held. 

I didn’t see too many downsides here; the worst case scenarios being that several countries imposed price capping on their loans to restrictive margins. A further 15% drop would have put the share price further down to 140p and a near 10% yield.

Price action over the next year shows these fears gradually receding:

In a quite rare feat, I have picked the bottom, and there was no real movement in the past year underneath my purchase price. The price recovered fairly quickly and then dropped back. As you can see in the past 6 months, it’s been fairly jumpy, getting above 200p and then falling back.

It should be noted that in the past six months, former parent Provident Financial also suffered a share price crash owing to a sudden discovery of profit impairment to one division and an FCA investigation in another. I didn’t get involved in that due to not wanting to get too overweighted in one sector, but the recovery would have been broadly similar.

So, what has caused this recent rise in the share price? Results were released on 1 March for the year to 31 December 2017 and were showed an increased bottom line figure (although this figure was surpassed by favourable FX movements). It was somewhat of a year of transition, as increases in markets such as Mexico and Southern Europe were offset by a decline in Northern Europe, with Poland undergoing a restructuring.

Overall, the results were treated well by the market though, and this saw the share price surge. On a valuation basis, there is still a good dividend of 5%+, and the P/E ratio is around 7; using these metrics this is still a fairly cheap company.

Additionally, the product IPF sells (credit) is not going to go out of fashion; and the company are embracing technology to embrace a digital platform which improves consumer flexibility. It has the ability to avoid certain countries where competition and/or regulation would be too high, and also the freedom to start up in other countries. I suspect there may be more opportunities to expand via acquisition and there is a good track record of control over its subsidiaries.

The main fly in the ointment remains legislation; coming down harshly on this particular sector is easy PR for governments, although it should be said that other providers of finance potentially could be affected (for example, credit card providers). A backdrop of rising interest rates would initially benefit the company (as most of their debt is financed by bonds until 2020/21), although the ability to issue bonds at decent rates relies on continued good performance.

One immediate issue is the investigation by the Polish tax authorities into previous tax years. The company had this to say:

The 2010 and 2011 financial years are currently being audited by the tax authorities in Poland, and all subsequent years up to and including 2017 remain open to future audit. Provident Polska has appealed the decisions made by the Polish Tax Chamber, to the District Administrative Court, for the 2008 and 2009 financial years and has paid the amounts assessed of approximately 37 million (comprising tax and associated interest) which was necessary in order to make the appeals. As noted above, the 2008 and 2009 tax audit decisions are the subject of a process involving the UK tax authority aimed at ensuring that the intra-group arrangement is taxed in accordance with international tax principles and as a result the court hearings have been stayed.

In order to appeal any potential future decisions for 2010 and subsequent years, further payments may be required. There are significant uncertainties in relation to the amount and timing of such cash outflows. However, in the event that audits are opened, and similar decisions are reached for each of these subsequent financial years, further amounts of up to c. 123M may be required to be funded (including approximately 44M for the 2010 and 2011 years on which audits have commenced).

Appealing a decision means handing over the monies while an investigation is in place, that’s a hugely costly process. The fact that this has been open such a long time indicates that this is not an easy matter, and it even could be that a settlement is reached.

The board appear to be putting £160m (£123m + £37m) as the figures required if the judgements went against them. That is quite a figure, and enough to really batter the share price if the case is lost.

I am no taxation expert, but there are definitely a lot out there in the field. Shorttracker shows no material shorting has gone on; there was some activity building up at the start of 2016 – presumably when the Polish action was being rumoured, but this has now been closed off:

Whilst this not conclusive on its own, I tend to believe that the chances of adverse action are less likely than a favourable one for the company. Whilst even the best companies shares are shorted for various reasons, it appears that few are expecting the worst to happen.

Comparison to other loan providers is not that straightforward. Companies with a similar model of business include Provident Financial, S&U, Morses Club, and Non-Standard Finance, although all of these are UK-focused. 

What is striking is that all of these companies trade on a P/E of around 10, whilst IPF currently trades at 7.34. The difference to me can be explained by the current pending taxation case, and the fact that IPF trades in markets which are not as developed both in product and law, so uncertainty is higher.

10 could be regarded as a cheap P/E on its own, but I feel this industry is ripe for change. The European marketplace is changing, with P2P firms such as Twino and Mintos both acting as loan aggregators, who can then seek funding for their loans from individual investors. Both of these represent some threats as by means of linked companies they are loan originators in their own right. These companies are growing at a much faster rate.

I feel that IPF is fairly priced at the moment. The dividend appears to be safe and the major short-term threat appears not that likely to occur according to the markets. That said, I feel there are sufficient headwinds in the future. Stockopedia at the moment likes this share, giving it a rating of 96 and the share is at a 52-week high. 

Overall I am inclined to hold for the meantime. If there are further jumps in the price taking the P/E to over 8 I’d be inclined to sell out.

 

Pure Passive Investor. Always looking for ways to make money (but not myself) work harder.

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