Smaller Companies: Loan arrangers are riding high

Most stock market professionals would bracket Cattles and Provident Financial as two of a kind. They make small, unsecured loans to low-earning households and use an army of - mostly women - agents to collect the payments on a weekly basis. Both have also been amazing long-term stock market performers with share prices up almost identical amounts, showing around 90-fold appreciation since 1975.

My hunch is that both will continue to do well by targeting their special niche of the financially hard-pressed borrower. Banks and mainstream lenders are moving up-market and operating increasingly automated lending policies. This is leaving a big gap at the lower end of the scale for people who need some sort of credit but haven't the income, net worth or lifestyle to impress a computer.

However, the two companies are becoming less alike. The larger, Provident Financial, with more than 40 per cent of the market, is sticking to its tried and tested formula. It is exploiting demand, which has been growing in recent years at a highly respectable 10 per cent, with cost efficiencies to improve profitability. Like Cattles, the group is reporting its 1996 results shortly with pre- tax profits expected to show a 15 per cent rise and more of the same expected for 1997. A rating in the upper teens at 512.5p looks easily justified.

An intriguing aspect of Provident is what it will do with its growing balance sheet strength. It has already boosted its payout by cutting dividend cover from two to 1.75 times; one suggestion is that it may reward shareholders further by cutting cover again to 1.5 times. Alternatively, it may finally find an acquisition that looks appropriate, unlike the unhappy diversifications that characterised its strategy in the 1980s.

In contrast, Cattles has found a way of harnessing its strong cash generation to a more aggressive growth strategy, albeit still within the credit market. In effect, although its core business is still in weekly-collected loans with a 20 per cent share and 3,000 agents, Cattles is changing into a more broadly based credit provider.

Since Eddie Cran arrived as chief executive in 1990, there has been a two-stage transformation. Mr Cran sold off a hodgepodge of businesses (travel agencies, insurance broking and video libraries acquired during the 1980s) to focus on Shopacheck, the successful weekly credit operation.

Stage two led him to look for growth based on the group's expertise. Cattles already had a business, Shopaplan, which made larger loans (pounds 500 versus pounds 100) to people with bank accounts who were unable to obtain bank loans. It also had Cattles Commercial Finance, which made loans to small businesses that could not secure mainstream finance.

In 1994 he spent pounds 30m on two acquisitions, Welcome and Redam Factors. Welcome makes loans averaging around pounds 2,000 to individuals, while Redam takes over sales ledgers for small businesses, lending (factoring) against their outstanding invoices.

Both businesses are growing strongly. Invoices factored by Redam have trebled to pounds 90m in two years. Welcome is on course to have grown by 100 per cent in three years.

The chief limiting factors on the group's growth are not demand but supply. Unsecured lending to poor credit risks requires branches, systems and trained personnel who know their customers.

Presently, Cattles has 135 Shopacheck branches and 50 Welcome branches. Around 273,000 households with 350,000 customers use the Shopacheck loans, with a further 50,000 customers for Welcome and 50,000 for Shopaplan.