International Personal Finance has lost around a fifth of its value after the emerging markets lender revealed an unexpected change in consumer legislation in Slovakia, a move which could hit its business in the country.
Almost two years after Poland gave the company an unwanted Christmas gift in the form of a £2.4m fine and around three months since Poland placed a cap on all non-interest costs of credit, Slovakia also plans changes to loan legislation.
The proposals - which had not previously been discussed - were revealed just before the market closed on Thursday, following a vote in the Slovak parliament. IPF’s shares are currently down 21% or 68.8p to 253.7p, having fallen as low as 230p earlier.
The company said a 27% cap on remuneration would apply to all costs associated with a loan, whether mandatory or not. IPF said:
Based on our current understanding these changes would mean that all fees that IPF raises in connection with the issuance of a loan, including the fee for home service, would need to be levied at rates consistent with the remuneration cap.
The draft law will go before the president for approval, and if he vetos it it will go back to parliament early next year. If it is approved again there will apparently be no opportunity for a second veto. IPF said:
[If approved] it would have a material adverse financial impactd on [the] Slovak business and the company is very actively reviewing the implications of these unexpected amendments.
In the 12 months to June, the Slovak business generated £43m of revenues and £6m of pretax profit. Analysts at Liberum said:
[These amendments] came as a surprise to us and the company. The statement went on to say that if the legislation was enacted in current form it would, “Have a material adverse financial impact on its Slovak business.” The legislation may well be challenged before becoming effective. We leave forecasts unchanged, for now.
Our analysis suggests a hit to 2016 earnings per share of 11% to 19%. We increase our discount to the sector to 45% (old: 40%), giving a target price of 262p, 2016 PE of 9.5 times (worst case scenario).
At Numis, analyst James Hamilton said:
Slovakia announced a very different and materially worse interest rate cap than Poland and it looks to us that this market will now be uneconomic. It appears to us that it will (assuming the regulation is passed) be impossible for a significant proportion of the population to be able to get any form credit at all. This is however, not material in a P&L context but given the market concerns about regulation, we expect the share price impact to be more significant than the 5% decline seen yesterday.
The bears will argue that IPF is being regulated out of existence, but we suspect this is not the case and eventually Slovakia and Poland will repeal their regulation as illegal lending (with all its associated consequences) expands to fill the space left by legitimate providers of credit. Nevertheless, given where the valuation is, we do not see where valuation support is for the group given the annual cash return to shareholders is now in excess of 11%, with a PE of 8.7 times, and a 20% earnings per share compound annual growth rate since IPF came to market.
Consequently, we have no idea where the shares bottom. We expect to reduce our forecasts to reflect the £6m profit contribution of Slovakia. IPF are not aware of any other country that is considering similar regulation.
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