Follow that man (or woman)!

Friday, 13th March 2015 09:30 - by David Harbage

When board members buy or sell shares in their own company, canny investors take note. Such action, which can only be carried out in ‘open’ periods (ahead of a company year-end, and after the announcement of trading results) is perhaps the best indicator that one can expect when discerning how a listed company is performing. Such director purchases or sales, however small, have to be reported to the wider market in order that all existing and potential investors become aware. Call them ‘insiders’ if you wish. Although there can be good reasons for a senior executive director to sell shares (for instance a divorce settlement or property purchase), such transactions merit scrutiny to see if investors should have concerns and follow the insiders’ lead. 

As an example of such a transaction, yesterday the London stock exchange’s company news service (RNS) announced that Mr David Anthony, the chairman of Private & Commercial Finance Group (PCF), bought 150,000 shares at a price of 13.5pence on the 9 March and a further 131,666 shares at 15p on 10 March 2015. Following these purchases, Mr Anthony now owns 936,275 shares, representing 1.76% of PCF. The company’s year-end is 31 March and a pre-close trading update (an indication of how the business has performed in the period to the end of March) is likely to be issued in mid-April, ahead of publication of the final results in mid-June.  

PCF is a very small specialist finance company, market capitalisation is just £7.6m, which provides vehicle and asset finance to both consumers and small businesses in the UK. The objects of typical applicants range from classic cars to horseboxes, light trailers to buses, plant and machinery. Possessing a £100m loan book based on 14,000 customers, PCF has a low-cost (45 employees) internet-based proposal and independent (non-credit scorecard) systems to facilitate a fast efficient process. Progress on an application for a Banking (retail deposit taking) license is key to progressing the portfolio’s growth rate beyond the current circa 10% per annum level; maintaining high quality of lending – against a backdrop of buoyant domestic demand for motor cars - is also critical to delivering on management’s admirable focus on return on assets (currently 1.8%, but aiming for 2% this year, and then 3%).

A few observant investors appear to have followed the chairman’s lead, based on the immediate trades and uptick in PCF’s share price, and will trust that Mr Anthony’s confidence in the business is justified. It may be that the chairman, of 3.5 years’ duration, views the shares’ current sub-market valuation as providing the opportunity. Certainly, ahead of the trading update, the stock appears attractively valued on a price/earnings ratio of 11.9 times (the current year’s earnings forecast of 1.18p), falling to 9.7x and 8.0x based on two brokers (Panmure Gordon and Westhouse Securities’) forecasts for earnings in the years to 31 March 2016 and 2017 respectively. On asset value, the shares also appear underpinned, via the prospect of likely appreciation (diluted asset worth of 12.3p as at 30 September 2014) continuing into 2015.

The chairman is not the only significant stakeholder on the board of directors, Chief Executive Officer Mr Scott Maybury owns 3%, founder (and CEO from 1994-2008) Mr Anthony Nelson owns 3.1% and Managing Director Mr Robert Murray owns 2%. A management team that possesses a significant financial interest is a pre-requisite for some investing institutions and this finance house does not fall short in this regard. The writer hopes this article prompts a search for other director’ dealings (take a look at Share Prices, then Recent Directors Dealings on LSE.co.uk).

Finally, given its business activity, the “Follow the Man” saying should perhaps in the case of PCF stock, read, ”Follow the Van”!