UK Edition
Questor: Provident Financial has had a terrible year but it could still yet offer good returns
A pair of profit warnings after a bungled reorganisation, the cancellation of dividends and the departure of the chief executive all mean shareholders in sub-prime lender Provident Financial have suffered terribly this year, since the shares have collapsed and been kicked out of the FTSE 100 for good measure.
But the company has three bonds in issue. They all come with yields to maturity that may appeal to risk-tolerant income-seekers and could prove great value if Provident can reassure investors that its short-term woes will not become long-term ones.
The Provident Financial 7pc 2020 bond, which matures on April 14 2020, pays an annual coupon of £7 on every £100 bond held. That equates to a running yield of 6.9pc and a yield to maturity of 6.6pc.
The question would-be investors must therefore ask is whether the company is capable of paying the coupons and then returning the principal (in other words repaying the loan) when the bond matures in 30 months' time.
As of June, Provident had £207m in cash and further funding capacity of £377m from available bank facilities and retail deposits within its Vanquis Bank business. The company is also forecast to make £117m in pre-tax profits this year and £181m next year.
A £120m bond was repaid in October. Another £250m bond matures in October 2019, then this £25m one in 2020. There is also a £100m private loan from M&G. Add in the coupons and Provident still looks sufficiently liquid to cover these liabilities.
The Financial Conduct Authority investigation into potential mis-selling of repayment option plans between 2014 and 2016 is a further complication. Initial estimates of a £300m fine have since been pulled back to £100m.
In the event of a swingeing penalty, Provident could issue another bond and refinance the 2019 paper, have a rights issue or even sell one of its operations, such as car finance business Moneybarn.
All three options - if needed - should support the 2020 bonds, which have senior status, although they are unrated (as is the norm for paper traded on the London Stock Exchange's Order Book for Retail Bonds).
The bonds are by no means risk-free and they are not suitable for everyone but the yield to maturity reflects a lot of the dangers and could prove good value.
Questor says: Buy
Ticker: PFG7
Price: 101.5p
Update: JackpotJoy
The announcement on Oct 16 of the departure of chief executive officer Andy McIver, barely nine months after JackpotJoy's listing in London, might not look like a great start but the shares rose on the news, not least because experienced gambling industry executive Simon Wykes is arriving as managing director to work with executive chairman Neil Goulden.
Mr Wykes is known for leading the turnaround of Gala Coral's bingo division so he should be the right person to ensure that JackpotJoy makes the most of its position in the UK's digital, online bingo market.
Questor says: Hold
Ticker: JPJ
Price: 814.5p
Update: Pearson
Shares in publishing and education specialist Pearson are rallying hard in the wake of a reassuring trading statement and the launch of a £300m share buyback, but it is too early to say for sure that the firm is out of the woods.
We first flagged Pearson as a stock to avoid at 780p just under a year ago, during which time the company has dished out a big profit warning, cut its dividend and seen its shares markedly underperform. The company has responded with cost cuts and a key disposal, while it has (so far) also managed to meet its (downgraded) earnings guidance for 2017.
But even the third-quarter update raised question marks. Total group sales fell 2pc on an underlying basis against a 1pc increase at the first-half stage, to suggest trading is still getting worse and the rise of Open Education Resources (OER) remains a formidable long-term challenge.
Questor says: Avoid
Ticker: PSON
Price: 695.5p
Russ Mould is investment director at AJ Bell, the stockbroker