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PCF Group - Capital Network: Raising Retail Deposits will be Game Changer

Substantial growth in new business forecasted by management; the current customer portfolio stands at £128m which management expect to grow to £350m in 3 years and to £750m in 5 years across both Consumer and Business Finance divisions. The returns guidance is very positive with ROAA (Return on Average Assets) targeted at 2.5% and ROE (Return on Equity) targeted at 12.5%, with both metrics improving further in the 3-5 year horizon. Combined with the reduction in credit risk as the Group focuses on the Prime and Super-prime markets (low and lowest credit risk), the potential returns look attractive.

An exciting opportunity for the Group (PCF.LON) and new PCF Bank Ltd; the positives of operating a bank include the opportunity to diversify treasury operations and fund directly from the savings markets. Matching the funding to risk appropriate customer loans should be straightforward, managing the regulation and bank oversight less so as this is more complex, but the rewards could be significant. 
 
An authorised UK bank now seeking access to retail deposit funding; following bank authorisation PCF (PCF.LON) is now raising retail deposits. The group has historically relied upon more expensive wholesale market funding, but following the change to a diversified treasury strategy to include deposits, the fall in overall cost of funding will enable the Group to offer more competitive finance rates to customers in higher credit areas of the asset finance market.

Executive summary

Our forecasted profit estimate that per annum growth (CAGR – Compound Annual Growth Rate) in EPS (Earnings per Share) between 2017 and 2020 is c.25% driven by the growth in the loan book and the completion of the banking project with the termination of associated one –off costs. Between 2020 and 2022 PCF management’s guidance for the rate of growth in the customer loan portfolio, accelerates from c.34% pa to c.46% per annum, which all being equal, must mean that the growth in EPS between 2020 and 2022 must accelerate proportionally. However, in estimating EPS five years from the present time, in-line with management’s customer portfolio targets, we are facing a reliability issue due to the temporal uncertainty involved in a 5-year projection. We therefore moderate the maximum rate of EPS growth to 25% throughout the guidance period to 2022. Further, we estimate that beyond 2022 the rate growth in EPS is much reduced to just 5% growth, still a significant number in terms of today’s low rate of return environment, but more reliable in terms of what could be achieved long-term.
 
Our valuation measures include discounted dividends and multiples of NAV. For the former we assume that the very low dividend pay out to shareholders continues until 2022 wherefrom policy is set at a 40% distribution. Our cost of equity capital is set at 8.5%, lower than could be presumed as we suggest that the lower credit risk portfolio at that point in time translates into a lower equity premium.

Quick facts: PCF Group Plc

Price: 18.5 GBX

AIM:PCF
Market: AIM
Market Cap: £46.29 m
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Financial results and forecasts
Growth drivers
Management
Market conditions
Milestones & inflection points

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James Dolman discusses PCF Group's Interim results to end of March '18

James Dolman financial analyst at Capital Network is reporting significant progress across the business as PCF continues to grow according to its strategic plan.

on 05/31/2018

27 min read