Why I'd buy Neil Woodford favourite Provident Financial plc today

If you've followed Neil Woodford, you'll probably know he's very keen on the Financials sector. In fact, it accounts for six of the top 10 holdings in his LF Woodford Equity Income Fund, with Provident Financial(LSE: PFG) in ninth place at 2.4% of the portfolio valuation.

That's a fair bit of cash to trust to a company that's had huge problems, after a switch from using self-employed agents to full-time employees went badly and led to a profit warning.

The shares crashed, and at just 690p today, there's been no sign of recovery yet. But I think that's a mistake, and I see an oversold, if perhaps a bit risky, bargain here.

Some investors were understandably disappointed after the firm indicated that losses incurred by its Home Credit business are going to be at the top end of earlier guidance, to the tune of £120m.

FCA investigation

Interim chief executive Malcolm Le May spoke of engagement with the FCA regarding a regulatory investigation into lending by Vanquis Bank and Moneybarn, and some are fearing a penalty of up to £300m. Provident doesn't have the cash to pay that, and a rights issue is widely expected at the £1bn company.

The question is whether Provident shares are a good risk now, and I'm thinking they are. At a price of 697p, the shares are on a forward P/E of under eight based on forecasts for an earnings rebound in 2018. And it would drop to only 5.5 should 2019 predictions come good.

I see the ability to absorb a fair bit of dilution in that price while still maintaining an attractive valuation, and I think we're seeing too much pessimism.

Good value growth

My second pick is another Neil Woodford holding, and this time it's in the healthcare sector, which takes up two of the LF Woodford Equity Income Fund's top 10 slots. I'm talking about BTG(LSE: BTG), at number 18 in the portfolio. It develops products targeting critical care, cancer, neurological and other disorders.

Mr Woodford has held BTG shares for some time, and their five-year performance has been impressive -- a rise of 125% to today's 740p. But the price has fallen back by 11% since January 2015, and investors have had no dividends to compensate them.

Yet I see too much negativity in the share price, which is often the case after new growth candidates actually turn out to be longer-term prospects than early bandwagon investors think. In BTG's case, I think January 2015 marked the end of a typical growth spurt -- rational growth investors expect them, and just sit tight for the long term.

Great first half

September 2017 interims showed a 26% rise in adjusted operating profit, with adjusted EPS up 51% and free cashflow up 35%.

Chief executive Louise Makin spoke of the company's "scalable platform, with a portfolio of differentiated products, strong customer relationships and internal capabilities, with multiple drivers of growth in our existing business." Makin stressed that BTG has the financial strength to make "targeted new investments."

Full-year forecasts suggest an EPS hike of 27%. And though the resulting P/E of 25 might seem high to some, two more years of teen-percentage growth would drop it to 20 by March 2020. I see that as an attractive valuation, and I agree with the current Strong Buy consensus.

Buy when they're cheap

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended BTG. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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