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A big increase in bad debt provisions hits hard

by John Marshall

Beleaguered Findel chief executive Patrick Jolly says that he ‘doesn’t want a knee-jerk reaction’ to the current difficulties but, with the company admitting to a £5 million increase in bad debt provisions less than a month after a positive trading update, a plummet in its share price was inevitable. The surprise profits warning sent shares down 37% to a five-year low of 280p, with the credit crunch claiming yet another victim.

Jolly blamed the dramatic turn around on the fact that fourth-quarter sales were ‘promotionally driven’ with a consequential impact on margins, but the larger problem is the deterioration of the group’s bad debts position.

As recently as last December Jolly was boasting that ‘bad debts (were) historically steady through economic downturns,’ but it is now feeling the crunch. Although he claims that the group is ‘careful about those they recruit’ as customers, its customer profile is essentially sub-prime with a strong bias to C2, D and E socio-economic groups. They have to pay a 39.8% APR, which underlines their difficulty in obtaining alternative credit. The average loan is for just £200 but the incidence of bad debts has worsened..

What is surprising is that the company did not investigate more fully both these issues before issuing its initial update earlier in April. Jolly admits the group ‘keeps everything under review on an ongoing basis,’ but that the debt problem was uncovered so soon after the positive update is a cause for concern.

Although much of the home shopping business is credit-driven, the group has a strong and growing internet-based business, and is also integrating the Kleeneze operation it acquired some 18 months ago. These operations should be more profitable this year but the fear that the incidence of bad debts will worsen is set to continue to hang over the company.

Last October the company decided not to demerge its educational supplies division, but analysts such as Rhys Williams of Arbuthnot believe this is now more likely to be on the cards. Matthew McEachran of Kaupthing Singer & Friedlander also notes that the plummeting share price ‘may see break-up talks reignited’.

The group may seek to use the results announcement next month – 15 May – to reassure the market of its position but it is unlikely to succeed in the short term. The focus will be on the short-term risks from the debt mountain rather than the longer-term potential of the net-based businesses. The PE of 5.8 will remain low until credibility is restored.

The writer holds shares in this company