Description

IPF is growth story that has been forgotten.  While there is risk of a double dip in their territories, we think IPF has the potential to make 25-50% over the next 12 to 18 months as existing markets continue to improve and new markets turn profitable.  Despite a good improvement in its business since Q109, IPF is a stock that remains undervalued given its long term growth potential and high returns on equity.  Below we will discuss why we believe this discount exists and why we think this is a buying opportunity.

Price (pence):           205

Shares:                    256                        

GBP Cap:                 525

Business description:

IPF is a Central European (Poland, Czech) provider of home collection credit with new markets that are soon to turn profitable in Mexico and Romania.  These are micro finance, 6-9 month duration loans sold door to door via agents.  i.e the "Avon lady" of finance.  Please refer to our write-up from Sep 2008 for more background information.   

Upside valuation (in pence):

We think IPF can earn 20-25p in 2010, and 25-30 in 2011.  A 10x multiple on 25-30p 2011 earnings, would yield a 250-300p stock price and offer ~ 25-50% upside, with a growth story that continues compounding from there. 

We think IPF will receive a discount for some time given the uncertain operating environment.  Eastern / Central Europe remains a fragile economy and it may make sense to hedge out ones risk. 

Downside protection

From a downside perspective, while "quotational" risk in the name is high given the lower visibility in the business and the "pain memory" from what happened in late 08/09, we do not think it is deserved. 

From our perspective, we are impressed that in a year as bad as 2009 IPF still grew its book value. Few banks were able to do that - which is why we view IPF more as a service provider, than as a banking institution given the short loan duration and ability for IPF to quickly change it's lending criteria to decrease risk. 

Backing out earnings from existing markets vs. new markets is another way to frame downside protection, as the new markets created losses in 08 & 09, which are in start-up mode (see prior write-up). Existing markets generated 19p in 07, 26p in 08, and for 09 they are on track to produce 17p.

Misperception

We think the discount exists because people fear the uncertainty in the business model, it gets lumped in the central/eastern Europe banking sector, people see what happened to the stock in early 09, and because management is conservative and not that talkative.

What can be learned from 2009:

2009 was a tough yr but demonstrated the flexibility in the model.  A few bad apples can ruin the pie.  The way to think about this business is a core group of high quality "re-servable" customers (X) that can earn the company a healthy profit.  Next, there are riskier customers (Y) that management seeks out to grow earnings and expand next year's potential X, but we take some unknown risk for doing business with them if the world falls apart.  90% of X for most countries is incredibly stable, let's say, with maybe 10% being a bit on the risky side.  By their nature, a large chunk of Y are risky and we choose to go after them on purpose.  In normal times Y is great for growth, but in poor economic times Y's default on their loans and push down profitability below normalized levels.  In 2009, the Y's hurt IPF but the X's demonstrated the core customer group is a good one.

What's the point of X & Y?  We like to think of the reservable customer base X (good quality again being X) as being a group that could earn the company 15-20p in almost any environment.  While this is an estimate, it's a good way to think about the business as we fully believe that if IPF did not wish to be a growth company, they could become a dividend play like their former parent Provident in the UK and earn a stable earnings stream paying out an 8% yield with 95% of their FCF.  However, we prefer IPF continues their current strategy of finding new markets and growing their customer base. 

Anything good to come of the recession?

A lot of the competition in central europe has been washed out.  We don't have a way to quantify the amount but it seems safe to say customer's served by competitors that equaled 5-10% of the IPF customer base have exited.  No sign they are re-entering. 

Risks:

We see the biggest risk being the uncertainty in eastern / central europe.  A double dip would temporarily hurt IPF again.

Regulation is always a risk but nothing is on the horizon and we view it as background noise.  IPF has navigated regulation very well for years.

New market may not pan out.  Mexico in particular is needed to keep the growth story in tact.  Management shut down Russia in 09, another growth market.  But kept Mexico which we view as positive.

DISCLOSURE:  We and our affiliates are long IPF LN, and may long additional shares or sell some or all of our shares, at any time.  We have no obligation to inform anybody of any changes in our views of IPF LN.  This is not a recommendation to buy or sell shares. 

Catalyst

2010 Earnings

Mgmt needing to hit their incentive package stock price target by summer 2010