Economic uncertainty hits Funding Circle (FCH)

Group is still growing fairly rapidly, although expected revenue growth has now been halved.

Article updated: 2 July 2019 11:00am Author: Helal Miah

  • Shares drop 20% as revenue guidance is slashed.
  • Loans under management rise 37%, but tighter lending standards needed to protect the business.
  • An unprofitable business requiring continued investment that only brave investors should consider.

This morning’s first half update from the P2P lender adds to the woes for the company whose share price has had an extremely rocky ride since the IPO late last year. As expected, the uncertain economic environment has reduced demand from small businesses and led the group to tighten lending standards. This will significantly curtail revenue growth, from the previously expected 40% to now just 20% growth during 2019. The Share price has fallen 20% to £1.30 in early trading, brutally punishing investors who took part in the IPO that launched at £4.40 a share.

The group is still growing at a fairly rapid pace as the latest update shows that loans under management rose by 37% to £3.5bn. However, tighter lending standards from the group are needed to prevent an unsustainable rise in bad debts, protect the business and counter previous criticism. An increasing number of its loans are being funded through other institutions, some of them public bodies. This should help to improve lending for small enterprises and develop local regions, which are underserved by the current lending system. This is a more sustainable direction for the business in the longer term, however short term headwinds remain due to requirement of huge capital investments in technology.

The business is unprofitable and it looks like being so for a little while longer as, although it does expect that adjusted EBITDA margins will improve from the previous year. Funding Circle remains a share for the brave Investor and one we prefer to avoid.

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Helal Miah portrait photo
Helal Miah

Investment Research Analyst

After graduating with an economics degree from University College London, Helal started his career within private banking at Smith & Williamson Investment Management and later held analyst and fund manager roles with the Industrial Bank of Japan, Schroders and Mitsubishi Corporation. He is a chartered fellow of the Chartered Institute for Securities & Investment.