Andy Haste, the man trying to find a viable business at Wonga in the new era of proper regulation of payday lending, was half right. On joining as chairman last July he said Wonga would be smaller and less profitable in the short term. It is definitely smaller: revenues fell by a third last year. As for less profitable, well, it didn’t actually make profits. There was a thumping £40m loss instead.
The bullish case for Wonga says there will always be demand for short-term credit. In theory, a cleaned-up market leader, shouting its conversion to responsible lending, should be able to make sustainable returns even under a regulator-imposed cap on interest rates.
In practice, life may be more complicated. Wonga isn’t starting with a clean sheet. It is obliged to invest heavily in better software and has to cover the cost of laying off half its staff. Its brand name may also be toxic. Haste seems uncertain on that point. He is sticking with Wonga for payday lending (for now, at least) but new financial products may be launched under a different banner.
That would be probably be wise. If the Haste plan works, payday lending will contribute less than half the group’s revenues in five years’ time. The new products, aimed at credit-impaired punters, have yet to be unveiled. But if there’s any risk of infection from the Wonga brand, best to try a fresh label.
Haste, former boss of insurer RSA, starts the task of resuscitation with £125m of cash in the bank, so his diversification strategy will have a chance to work. But note the caution: “We know it will take time to repair our reputation and gain an accepted place in the financial services industry,” he says. That seems 100% correct.
Sky looks comfortable on the ball
Sky’s share price has risen 20% since the broadcaster “overpaid” for its next set of Premier League rights. Five plum packages cost the equivalent of £11m a game; a staggering sum. But the share price reaction offers a simple lesson. Sky’s shareholders really didn’t fancy living without top-flight football. Bidding high – about £1bn more than the City expected over the course of three seasons – was logical. Or, rather, it was the lesser of two risks.
The higher costs still have to be met, of course, which is why Tuesday’s third-quarter figures carried added significance. Any hint that customers will rebel against planned price increases might have prompted a rethink about Sky’s football addiction.
In the event, the churn statistic – which measures the percentage of customers cancelling subscriptions – was the best for 11 years, as was the number of arriving customers. Chief executive Jeremy Darroch served up superlatives after a 20% jump in operating profits and Sky’s shares hit their highest level since the turn of the century.
Game over? Not quite. First, the price rises – £2.50-£3 a month on average – haven’t happened yet; customers have merely been informed of the increases. Second, BT has opened a new competitive front by buying EE, obliging Sky to enter into the mobile market via a piggy-back wholesaling deal with O2.
Third, Sky has made its biggest commercial bet in years by unifying the European empire with the purchases of Sky Italia and Sky Deutschland. It will be two years – at the earliest – before the success of those deals can be judged.
Investors are right to be confident that Sky can handle a bigger and more complicated operation. The company never shoots itself in the foot and, by now, Darroch should have a keen sense of the prices UK customers will tolerate.
All the same, the shares now trade on 17 times next year’s earnings, on house broker Barclays’ forecasts. That looks punchy, even with a 3% dividend yield. One football auction has been safely negotiated. But the football beast will always need feeding again.
Don’t fear coalition
Why aren’t financial markets, little more than a fortnight ahead of a too-close-to-call general election, terrified? Did nobody listen to the great sage, WPP’s Sir Martin Sorrell, when he said the choice was between a Tory-led government that would produce “significant uncertainty” on Europe and a Labour-led administration with a “bashing business” manifesto?
Citigroup’s Tina Fordham has the explanation. There is probably less to fear from a minority government than in past. Labour policies would hit specific sectors but the differences in fiscal policy are “minimal”. In short: “Markets look likely to view divided government like Wall Street: gridlock is good.”
That’s a reasonable real-world assessment.
