10/04/2006
At face value, Private & Commercial Finance has nothing much to offer investors.
It has been loss-making for the past few years, has a recent history littered with legal disputes, restructurings and divisional closures, and operates in one of the most uninviting areas of the market – car and vehicle finance. Its meagre £3 million market value is another off-putting attribute – as is the fact that the house broker reckons that the shares merit nothing more than a ‘hold’ rating.
But, if you are inclined to take on some risk this month, PCF could repay a punt.
The group’s business is quite simple. Its consumer finance division lends people money to buy cars, while its business finance operation lends money to companies for the purchase of everything from light commercial vehicles, to buses, engineering equipment and mobile cranes.
Back in the heady days of 2001 and 2002 it made a lot of money in this line of work and picked up an array of accolades for the speed at which its business was growing.
However, it soon after crashed into all manner of problems.
The biggest was the severe competition in the car finance market, with car manufacturers lending at nought per cent finance to shore up new car sales, and many high street players – including the likes of Sainsbury’s Bank – piling into the sector.
The situation was never going to be sustainable, which is why the likes of Yes Car Credit and Lombard Motor Finance (to name but two) have gone to the wall, and other organizations have exited the car finance game completely.
PCF itself most recently closed its inappropriately named Karma Cars division after it racked up sustained losses.
PCF’s other difficultly has been of a legal nature. A few years back it used to lend to ‘sub-prime’ people (ie those with less than spectacular credit ratings). It insured itself against losses until the insurance company, National Insurance & Guarantee (NIG), unilaterally pulled out of the arrangements.
A court battle royal ensued which PCF finally won in 2004. The victory though, was bittersweet, because, as chief executive Tony Nelson explains ‘we had to run down our insurance book for the duration of this conflict’.
The closure of Karma Cars, coupled with the harsh operating environment and the simple fact that it had not yet fully recovered from the dispute with NIG, ensured last year’s results were poor. In all, a thumping loss of £3.8 million was made from sales of £45 million.
However, there is a great deal of evidence to suggest that PCF’s fortunes could radically improve this year.
Says Nelson: ‘we are quietly confident because we think we have the right business model. We only use finance brokers – so, unlike other operators we don’t have a branch network and a sales force to support, which brings down our operating costs.’
The other feature of the business making Nelson bullish is its online quotation system for issuing insurance quotes. ‘Our internet-based quotation system is fantastic. It’s simple to use, very intuitive, very quick and is proving very popular.’
Nelson says that ‘new business volumes are up over 60 per cent in January and February’ and that the online system ‘handled something in the region of 10,000 proposals during March’. If the usual percentage of business has flowed through, March could prove one of the busiest in the group’s history.
Over in the business finance arm, the plan is to ‘continue to accelerate’ growth. New business volumes here doubled to £17.1 million in 2005 and the online quoting system will be rolled out in the second half of the year.
As for the group’s battered balance sheet, it was recently shored up with a £1 million fundraising from Aberdeen Holdings Limited, which now holds over 23 per cent of the shares. Aberdeen is the vehicle closely associated with PCF’s non-executive director Faisal Al Yousef.
With almost all of its troubles behind it and competitors exiting this arena, Nelson believes his company could be on the verge of creating the kind of critical mass that is crucial to its future. However, as house broker Seymour Pierce points out, the next few months will be key. So much so that the broker remains ‘cautious’ about its forecast of a £400,000 profit this year, on sales of £55 million. For 2007, it tentatively posits that £1 million could be made on sales of £60 million. This caution is writ large all over the company’s currently beleaguered share price of 18p, which puts PCF on a p/e of 12 for 2006 and a forward rating of just 4.8 for 2007. There are many risks here, but PCF could pay out for those bold enough to jump on board. Speculative buy.
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