PCF GROUP – Rapid growth in sight

Last week’s news that Non-Standard Finance has made a £1.3bn move for Provident Financial (LON:PFG) has concentrated my attention on the lending sector.

A little finance company that I have been following since it floated on AIM in September 1998 has since 2017 been authorised as a bank and is now beginning to look very attractive. It certainly has growth in mind and last week raised £10.5m of new funds to back its strategy over the next few years.

PCF Group (LON:PFC) has the capability to increase its lending portfolio quite significantly – from the £350m target by end September 2020 to £750m by 2022.

It currently offers retail saving products for individuals and corporates and then deploys those funds through its four lending divisions: Consumer Finance, for used motor vehicles; Business Finance, which lends SMEs finance for plant, equipment and vehicles; Broadcast and Media, financing equipment in those sectors; and Bridging Property Finance, the recently launched short-term residential property lending side.

New business originations in the group’s existing markets of consumer motor finance and SME asset finance have increased significantly, capitalising on the anticipated cheaper cost of funds and more flexible nature of a retail depositor base.

The growth in the group’s expanding lending portfolio has been based on prudent credit policies, with its low-risk appetite focussing on increasing volumes by operating in the prime sector of both of its main markets. It is ahead of schedule to meet its initial portfolio loans and receivables target of £350m and a return on equity of 12.5% by end September 2020. Its 2022 target of £750m is based on a 15% ROE. The 2018 return on equity increased to 10.3% (2017: 8.7%).

The group continues to assess opportunities to accelerate its growth through market consolidation and strategic alliances.

Pre-tax profit for the 12 months ended 30 September 2018 was up 44% to £5.2m (2017: £3.6m). Earnings came out at 2.0p per share (2017: 1.5p).

The Common Equity Tier 1 Ratio was 19.3% (2017: 26.3%).The capital ratio is a measurement of a bank’s core equity capital compared with its total risk-weighted assets that signifies a bank’s financial strength.

At the year-end it was interesting to note that there were £47m of unearned finance charges to contribute to earnings in future years (2017: £31m).

During the year to end September 2018 the lending portfolio grew by 50% to £219m (2017: £146m) with a continued focus on prime quality customers. Retail deposits grew to £191m (2017: £53m).

The October 2018 acquisition of Azule, a broadcast and media finance specialist, was the first step in the Group’s strategic plan to diversify its portfolio. That acquisition was earnings enhancing and the subsequent integration of the business is progressing well.

The group’s newly-recruited bridging property finance team has in the last month or so commenced operations, and is targeting an initial portfolio of £20m by 30 September 2019.

Current trading is in line with management expectations. As at 31 December 2018, the lending portfolio had grown to £250m whilst retail deposits stood at £203m held across approximately 4,600 customer accounts.

The company has had consistent growth and increasing profitability over the last five years from £1.5m in 2014 to £5.2m pre-tax last year. Now I am hoping for some £8m pre-tax in 2019 and then £11.5m or so next year, worth nearly 4p in earnings.


The successful Placing at 30p per share, was well supported by its near 63% Bermuda-based shareholder Somers Limited, which is a financial services investment company with $20bn under management and it also owns: 100% of the Bermuda Commercial Bank; a 62% stake in Resimac, a leading Australian non-bank financial management business with Aus $12bn under management; and a 62% stake in Waverton Investment Management, the wealth manager with £5.7bn under management. Somers recently sold its 55% stake in Stockdale Securities, the UK broker, to Shore Capital.

Other interesting shareholders to note include: Hof Hoorneman Bankiers, with a pre-placing 8.9% stake in PCF, they are value investors based in Maastricht, Netherlands with 2.1bn euros of managed assets; and Belieggingsclub Stockpaert, an investment club of mainly alumni of the Erasmus School of Economics in Rotterdam, with a 3.2% stake.

We will get an indication of just how well trading is going when the company holds its AGM in two weeks’ time. In the meantime, patient investors will undoubtedly start to build up their holdings in this expansive but undervalued bank. Now just 32p I suspect that these shares will go a lot higher than their 2018 peak of 43p.