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Bond of the Week: 28 February 2014

IPF Revisited


This week an old favourite International Personal Finance has released positive results to the market and warrants a further mention. The bond first listed on ORB in April 2013 with a 6.125% 2020 coupon and then again through a second tranche in November 2013, both have been covered previously here and here. There is also an active discussion thread in our bond forum covering IPF which is always worth reading for user insight. When the bond first launched it was at a time when all other bonds on ORB were trading above (and in some cases significantly above) par and as such was very well received, highlighted by the fact that the price quickly traded up to near 104. When the second issue was added in November at a net price of essentially 100.75 it provided another opportunity for yield hunters to take up one of the highest yielding bonds on ORB (the current yield is around 5.9%).

Regarding the recent set of results that pushed the share price 10% higher, Chief executive Gerard Ryan said:“2013 has been a year of significant progress for our business with consistent delivery against our Strategy for Growth, a strong trading performance and robust profit growth. In addition to maintaining very good portfolio quality, we entered two new markets, developed our product range and made good progress in our funding objectives. Although we saw heightened regulatory challenges and increased competition we are confident that our strategy and business development will continue to deliver further growth in 2014 and beyond.”

The key points from the results are listed below:

Record full year profit up 24%

  • Profit before tax of £118.1M reflects strong underlying growth of £27.1M and after absorbing investment costs of £4.4M in new market expansion
  • Revenue for the year increased from 9% in prior year to 11%
  • Effective management of credit quality alongside growth, with impairment slightly lower at 26.6% of revenue (2012: 27.0%)
  • Cost-income ratio improved to 39.5% (2012: 39.8%) after absorbing new market entry costs

Strategy continues to deliver growth

  • Customer numbers increased year-on-year by 7%
  • Strong credit issued growth of 15%, with more than £1 billion of loans granted in 2013
  • Longer-term, higher value loans rolled out in Poland, Czech Republic and Slovakia
  • Lithuania and Bulgaria established and building geographic coverage
  • Strong growth continues in Mexico
  • Customer growth accelerated to 9%
  • Revenue growth of 21% drove profit increase of 58% to £14.5M
  • Profit per customer increased to £21 (2012: £14)
  • First loans issued in Mexico City in December

Robust balance sheet and delivering good returns to shareholders

  • £60M share buyback programme completed in November
  • Equity to receivables of 50% in line with revised target
  • Proposed full year dividend increased by 20% to 9.3 pence per share

As far as the underlying company is concerned the analyst recommendations are generally favourable.

  • Peel Hunt have a hold rating (as 27/2/14) with a 540 price target.
  • Berenberg Bank hold (as 28/2/14) with a price target of 565
  • RBC Capital markets say outperform (as 2/26/2014) with a price target of 595
  • JP Morgan say neutral 9as 26/2/2014) with a price target of 644
  • Numis say buy (as 26/2/2014) with a price target of 610.
  • The only recent negative is Panmure Gordon with a sell rating (as 26/2/2014) and a price target of 400.

The stock itself has significantly outperformed the market over the last two years, but is currently overbought and showing relative resistance to the FTSE100. This suggests the next short-term move for the share price maybe to the downside before long-term fundamental growth may prevail.

When the bond market came off over the summer it was slightly more resilient than the ORB market overall. A leading factor in this may have been the high premium of which most bonds were trading at the time, so IPF did not have as much to give back. For those that did not see the previous bond of the week on adding multiple bonds to charts you can see it here.

As the bond is still trading around par and the company’s strategy of low risk long borrowing and short lending is continuing to perform well in line with geographical expansion into Mexico it could be worth tucking some of this away near par for capital appreciation and a high yield. There are of course worries regarding regulation as the short term lending market is still under scrutiny. However, IPF distances itself from the new breed of payday lenders by being slow to develop their web presence and focussing on the personal relationships between their borrowers and door stop agents. It may be this lack of innovation that in the long term helps the company avoid the inevitable increased regulatory burden to online short-term and payday lenders.

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