Provident joins the elite, but it's only for the brave

French Connection offers value; Spring too risky despite bounce

It is a mark of the depths by which the stock market has sunk that Provident Financial shares can have fallen some 12 per cent in the past three months and yet have moved up into the top 100 of the UK's biggest listed companies. But that's relative outperformance for you.

The door-to-door lender's elevation to the FTSE 100, confirmed yesterday, puts the company in the big league, and it is ambitious to grow into its new status. It lends at high income to those deemed too much of a credit risk by more mainstream credit providers. As the great consumer boom in the UK has gathered pace, the company has had to search pretty hard to find anyone that the high street banks won't give a credit card to, and so much of its strategy is focused on developing new markets overseas, in eastern Europe and even as far as Mexico. Needless to say, this is all very high risk stuff.

The level of bad debts – up to more than 9 per cent of the loan portfolio – was one of the key figures in Provident's most recent figures at the start of this month. However, fewer provisions were needed in the Polish and Czech markets in the second half of the year, suggesting that the group was getting used to its customers in the Wild East.

The new Mexican adventure has upped the risk profile again just as investors were starting to get less jumpy. It will also incur £1m in start-up losses to hamper earnings growth in the coming year.

The UK "sub-prime" lending market is a difficult one to call. Provident would have it that a rise in unemployment and tougher economic times will lead the high street banks to take fewer risks and drive people into its arms, especially for use of its new credit card. Just as likely, slowdown will lead to an increase in bad debts that could hit Provident hard since it has been forced down the credit quality spectrum in recent years.

Its expansion into car credit, through the acquisition last year of Yes, could help take up some of the slack from its motor insurance broking business, which is declining. But the risks are high and rising and, even with a tempting dividend yield of 6 per cent, the shares are only for the brave.

French Connection offers value

At a time when profits growth is limited and dividends risk being cut, French Connection stands out like haute couture in a jumble sale.

The stylish retailer produced some particularly well tailored results yesterday with underlying full-year profits up by 30 per cent to £29.5m and a 50 per cent hike in the dividend. The figures led analysts to upgrade forecasts for 2004. The shares, tipped here at 835p last September, jumped 6.6 per cent to 960p.

French Connection's success is based on stylish, own-brand clothes sold at premium, but not outrageous, prices. Its FCUK advertising slogan has been one of the great fashion successes of the last decade.

With 82 stores in the UK and Europe and another 36 in the United States the business has been growing steadily. Further growth will come from a 15 per cent increase in UK selling space this year and a fresh commitment to double store numbers in the US in five years. The US retail operation has so far been loss-making but is forecast to break even in the current year.

One of French Connection's problems is that it is a smaller retailer which can get dragged down by sector woes. This was the issue last autumn when concern over consumer spending hit high street shares.

But French Connection has still managed to outperform both the sector and the market. Analysts have upgraded current-year profit forecasts to £35m and the shares trade on an undemanding price-earnings multiple of less than 8. Good value.

Spring too risky despite bounce

The first buds at Spring? The recruitment group, which specialises in placing IT contractors, returned to the black yesterday after a year when a new management team finally seems to have cleaned up the mess left by its two predecessors. Having ended some of the wilder adventures in cyberspace, the company is concentrating now on generating cash from its business.

Pre-tax profits in the second half of 2002 were £700,000, reducing the total loss for the year to £8.8m and leaving analysts forecasting profits of £3m to £3.5m for 2003.

But hold on. Lots depends on the UK economy. The market for IT consultants has been depressed since the bursting of the internet bubble, but it still doesn't feel like the bottom. Spring also has a reasonable sized general staffing business, which has 30 offices across the country, and which could suffer if unemployment does not stay at its historic low.

Spring is the most attractive group in the sector, and will surely survive the downturn. Shareholders already nursing losses can reasonably decide to treat the company as a very long-term investment. The group has a £52m cash cushion and is winning market share as a result of its financial strength. There will also be long-term gains from its ability to run a company's entire IT recruitment. But there is no joy in trying to call the bottom for the sector as a whole, and the risk is too great that a new frost may nip recovery in the bud. Don't buy.