Troubled subprime lender Provident Financial (LSE: PFG) is set to be relegated from the FTSE 100 when the FTSE committee publishes its latest quarterly index review this evening. Private hospitals group NMC Health (LSE: NMC) is poised for promotion to the top index from the second-tier FTSE 250.
The reshuffle is based on market capitalisations at yesterday’s closing prices and, according to my calculations, Royal Mail is also set to exit the FTSE 100, having slipped just below the automatic demotion level at the eleventh hour. My sums say this would pave the way for housebuilder Berkeley to be promoted in its place.
Unmitigated disaster
Provident Financial has seen £3.2bn wiped off its stock market value since the last FTSE quarterly review in May. Its shares have nosedived 70% from 3,057p to 906.5p at yesterday’s close. Two spectacular profit warnings have done for the group. It’s now valued at £1.3bn and doomed for demotion to the FTSE 250. It’s a sorry day for a company that had gained its FTSE 100 status in December 2015, having thrived after the financial crisis, as traditional banks withdrew from higher-risk lending.
The cause of Provident’s woes has been a switch to a new operating model in its home credit division. This has seen a fundamental change from its traditional model of serving customers via an army of self-employed agents to employing in-house ‘Customer Experience Managers’ and greater use of software. So far, it’s been an unmitigated disaster, with reduced agent effectiveness resulting in a progressive deterioration in collections, sales and customer retention.
Positives and negatives
There’s an argument that the fall in Provident’s shares is overdone, put forward by major shareholder Neil Woodford, among others. Making some huge assumptions, he suggested a valuation of three times potential 2019 earnings with a potential dividend yield for the year of 15% — albeit at the time he was writing (the day of the second profit warning), the shares were trading at an intra-day price of around 520p.
However, with the company having downgraded its home credit division, profit for the current year to £60m from £110m at the first profit warning and then to a loss of between £80m and £120m just nine weeks later, this is a major crisis and there is zero earnings visibility. The chief executive has departed, the dividend has been suspended and one of the products of its banking division is also under investigation by the Financial Conduct Authority. I can only see Provident as a stock to avoid for the time being.
New entrant
There’s a far happier story for NMC Health’s shareholders, with their company’s ascension to the FTSE 100. Since the last quarterly review, its shares have risen 22% from 2,187p to yesterday’s close of 2,670p, giving it a market cap of £5.5bn.
This fast-growing and leading private sector healthcare operator in the United Arab Emirates trades on a high 34 times current-year forecast earnings. However, with earnings expected to grow at 30% a year for the next couple of years, I see scope for the shares to make further advances and for the company to climb up the FTSE 100 rankings. As such, I rate the shares a ‘buy’.