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PFG have issued another positive trading statement seeing better than expected results on the back of better macro (read better provisions) and better demand for credit (read more income). Clearly not quite in the same segment as Morses anymore, but the message fits with the picture of furlough and additional Universal Credit ending without a bump and strong underlying demand as spending continues to normalise. PFG +2% today, +56% since 28 June and now within 23% of pre-covid levels (31/12/19)
At Morses there may well be a lag in profit recognition due to the impact of IFRS9 discussed many times on this site, but the underlying profit drivers will be strong and bode well for the new financial year. Morses is down 39% since 28 June and is still down 58% versus pre covid levels.
Look at page 119 of the 2021 annual report. I’ll try and answer your question simply.
Yes the provisions go in the balance sheet. The receivables are shown net of the provisions. Under IFRS9 every loan that Morses writes it has to provide UP FRONT an element that it expects to lose over the life and then reassess the requirement as the loan seasons over its life up to the point of collecting. The P&L charge is the movement of the opening and closing provisions, net of collections, write offs and provision build, which is linked to the size of the book and the new credit issued. When growing quickly the provision up front outweighs the income booked and there is a J curve in profit recognition. The provision models are based on the company’s experience and also a forward looking assessment of the environment. If things are expected to be improving you need less provisions and vice versa. See the previous post on 4 Jan for more colour.
IFRS9 will always create a drag on profit recognition in a growing consumer credit book. When it’s growing like the digital arm of Morses AND the extant book is still small then you get the loss making position. This is mechanical and accounting, but stops when you get to a tip over size as the new lending as a share of loan book dips and begins to season with book growth. Then you get strong profit growth; very strong. Look at the dynamics of IPF as a good example of a steady state high cost consumer credit book. If the underlying CASH yield, loss and cost needed to run the business is unchanged then the key driver of profit is loan book size and if this gets back to pre-covid levels then profit and earnings will follow. It’s just timing and given the nature of the business the lag shouldn’t be too long.
As the RNS stated, time ran out relative to what agreed and with funding extended (assume existing funders are thus comfortable with the new business mix) the option to pursue the scheme must have been less attractive. Hence back to plan A, I guess.
In the meantime the business looks to be performing well from a volume perspective and with the end of furlough been and gone without a hitch, I’d suspect collections are good too.
The story hasn’t really changed and the stock has practically halved since the summer. Maybe the poor sentiment continues due to the new variant, but Morses looks like a very well capitalised, well funded and well run business with a digital lending footprint that fintechs would value in an industry where barriers to entry have increased and competitive pressure has reduced. Much easier to do the right thing and still grow at attractive returns. One to hang on to.
The results were indeed very strong, stronger than I expected - I bought more.
The market is in a funny place right now trying to absorb the shifting dynamics around rates, inflation and lasting Covid-19 economic implications. The small high cost lenders are seen as vulnerable as their customers are theoretically more exposed to tighter household cash flow. I take a different view.
The excess savings caused by covid was market wide - hence loan books prime and sub prime shrank. Household balance sheets are stronger than normal and so we need to see a drawdown on savings to get back to more normal credit demand/issued. So it’s good news not bad. It’s why the results were better and will keep getting better.
Im in this one for the long game in size. Dividend and capital growth = 2x over time at theses levels. Stick with it. Morses Club is another good one to look at and has been impacted even more by the above sentiment.