Virgin Money UK (LON:VMUK) - Finally, A Successful Challenger Bank

24th Jan '23 by Roland Head

5 comments 1661 reads

Summary

After some difficult years, last year’s results from FTSE 250 challenger bank Virgin Money UK (LON:VMUK) were characterised by improved profits, top-line growth and a new confidence.

Cyclical risks can’t be ignored, but the bank’s shares continue to trade at a wide discount to book value. This suggests a potential opportunity, if existing momentum can be maintained.

Bull points:

Recent results show continued growth and a strong capital position
Rising interest rates are contributing to improved profitability
Trading at c.50% discount to tangible book value; cheaper than peers, despite similar profitability
Newly-established dividend provides attractive 4%+ forward yield

Bear points:

Economic slowdown raises the risk of elevated losses from bad debt
Virgin Money has not yet established a long-term track record of profitable through-cycle lending
Company still lacks scale against the big four high street banks

Profile

About the stock

Virgin Money UK operates in the Financials sector and is part of the Banking Services industry group.

The group’s shares currently trade at 192p on the LSE Main Market. Virgin Money is a member of the FTSE 250 and has 1.4bn shares in issue, giving a market cap of £2.7bn. Free float is 79%, so liquidity should be excellent.

The StockRanks are favourable for Virgin Money, with particularly strong ValueRank and MomentumRank scores. However, a weak quality score is a reminder of recent loss-making years and flags up the group’s turnaround status.

The shares are classified as a Speculative Large Cap Turnaround by Stockopedia’s algorithms.

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Recent share price action has been positive, probably helped by November’s solid full-year results and recent bullish market conditions.

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About the opportunity

Virgin Money is classified as a Turnaround, highlighting strong value and momentum scores. The stock seems to have the wind in its sales at the moment, supported by last year’s results.

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If the bank can maintain recent improvements in its quality metrics, then the shares could potentially benefit from a further re-rating and perhaps achieve Super Stock status.

Business & Model

What is the company’s history and what does it do?

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Lucky dip

24th Jan '23

excellent article Roland. I am a holder of Virgin Money and prefer reading this sort of analysis as most of my holdings are not in Aims or small caps.

On balance I think I intend to add to my holding.

Lorna Davidson

I agree with lucky dip. Small cap articles make up too much of the info posted from stockopedia. My investment interests are in larger cos with potential growth and/or strong yields.
I’m likely not to continue after my sub is up for this year for that very reason

rmillaree

I had/have a bit of a punt on this one - wish i had loaded the boat when the shares got dirt cheap but i had already doubled up on the way down so couldnt over commit when price carried on its downward progession. For once doing nowt wasnt a bad idea.

My thought process was virgin is a reasonably respected brand - main big banks are shockingly bad at customer service and p/e was dirt cheap. (not convinced p/e ever work for banks that are always prone for huge provisions to turn up out of nowhere.)

Note they have been spending money closing down branches and the like - merging the brands etc - so i suspect one of costs over the last 5 years have ben larger than we can expect going forward - i think they had quite abig legacy estate of old buildings they simply needed to get shot of.

They seem to be ticking over - must admit i havent really paid much atention - havent opened an acount so not sure how good their app is.

I guess the danger is that the younger generation will probably be more likely to go with challenger app bank - if they dont make the app based banking as good as starling and revolut ? has anyone tried then virgin app?

I was kinda hopinmg for quick 50% gain that never turned up although it has done for the top up, i did on the way down.

Possibly a nice boring portfolio type play for some who want something simple. Only thing with bank shares is that in the past its only been a matter of time to the next financial armageddon - has that changed now they are better capitalised - i kinda suspect probably not - black swans are never dead and buried.

Aargh Aitch

I watch this institution- which I refuse to call Virgin money- closely. They don't consider their branch network as an asset though, they cynically ran down the Yorkshire Bank branch in Skipton before closing it despite the- assumed- opportunity to mop up Lloyds, Barclays, "HSBC" and TSB customers who were being left high and dry by branch closures in Settle, Barnoldswick and the Bentham's as well as Skipton itself. Our attempt to open a clubs and societies account for our Quaker meeting was stalled again and again and then lo and behold they closed. Methinks staff had been told to discourage new accounts in preparation for pulling out of the community.

I'm surprised you consider the Virgin name an asset Rowland, but perhaps it depends on where you live. Virgin West Coast blocked the revival of Skipton-Carlisle-Glasgow train services and then walked away from their Virgin East Coast obligations on 2018 leaving Joe and Imelda Taxpayer to foot the bill. The existence of "Beardy" as major shareholder makes it a no-no for me.

MGerard

Return on equity < 8% but stock rank > 90. Something wrong there. Cost of capital implied by ptb > 15%.

Virgin Money UK (LON:VMUK) - finally, a successful challenger bank

Summary

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Business & Model

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Roland Head

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