Lending discipline tempers pace of growth

S&U 7 February 2019 Update
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S&U

Lending discipline tempers pace of growth

Q419 trading update

Financial services

7 February 2019

Price

2,150.00p

Market cap

£258m

Net debt (£m) at end July 2018

121.4

Shares in issue

12.0m

Free float

26%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.4

2.4

2.4

Rel (local)

(3.6)

0.9

2.3

52-week high/low

2790.00p

1920.00p

Business description

S&U’s Advantage motor finance business lends on a simple hire-purchase basis to lower and middle income groups that may have impaired credit records which restrict their access to mainstream products. It has just over 59,000 customers. The Aspen property bridging business has moved beyond the pilot stage and is expanding its loan book (just over £18m at end-January 2019).

Next events

FY19 results

26 March 2019

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

S&U is a research client of Edison Investment Research Limited

S&U’s year-end trading statement indicated that FY19 results would be in line with expectations. Motor finance new business has slowed recently reflecting a combination of more intense competition and S&U’s maintenance of tighter credit criteria. As a result, FY20 starts with lower receivables than we had assumed, and it also seems prudent to allow for lower growth than previously. Our FY20e EPS is reduced by 4.7% but the prospective ROE remains above 17%.

Year end

Revenue (£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/17

60.5

25.2

169.1

91.0

12.7

4.2

01/18

79.8

30.2

202.4

105.0

10.6

4.9

01/19e

90.7

34.3

230.1

116.0

9.3

5.4

01/20e

95.9

36.5

244.6

122.5

8.8

5.7

Note: PBT and EPS are reported.

Broadly in line for FY19

Overall trading was reported as satisfactory and FY19 results are expected to be in line with consensus. The main business, Advantage motor finance, has continued to see a high level of loan applications, but the combination of increased competition and adherence to previously tightened credit criteria has reduced new transactions, and the level of receivables at c £261m was modestly below the £267m reported in the last update on 7 December and our estimate of £268m. Positively, there is evidence that loan quality is improving as underwriting changes start to feed into the loan book. The Aspen property bridging business ended the year with a loan book just above £18m compared with £11.2m at the end of January 2018. The gross margin on new loans has been running ahead of Aspen’s budget. S&U has declared a second interim dividend of 35p (+9.4%), giving a dividend so far for FY18 of 67p versus 60p. The board intends to restore dividend cover to 2x when setting the final payment.

Competition and credit discipline trim FY20e

There is only a marginal reduction in our FY19 estimates reflecting the indicated level of year-end receivables (EPS -0.5%). For FY20, we have assumed a more modest level of motor finance receivables growth (6% versus 10%), noting both upside and downside risk subject to the ebb and flow of competitive pressures, in addition to the macroeconomic background. We still look for the Aspen loan book to expand to £30m.

Valuation: Still implies caution on future returns

Although our estimates are reduced, we still project returns on equity of over 17% for FY19 and FY20 and note that an ROE/COE model suggests the current share price is discounting a return of 13.8% given a cost of equity of 10% and growth of 4% (see further discussion on pages 2–3).

Estimate changes

The key figures from our adjusted segmental forecasts are shown below, with the main changes since our last note in December being the lower assumed levels of receivables for motor finance referred to earlier. Aspen property bridging is in the early stages of its development, having moved out of the pilot stage towards the end of calendar 2018. The year-end loan book was somewhat lower than we had assumed at just over £18.1m versus £20m, but we do not see this as particularly significant given the potentially lumpy incidence of loans which have an average size of c £380,000. As noted earlier, we have kept in place the assumption of a year-end loan book of £30m for FY20. Further details of our forecasts can be found in the financial summary (Exhibit 4).

Exhibit 1: Segmental analysis

£000s

2016

2017

2018

2019e

2020e

Motor

Net accounts receivable

145,141

193,529

251,215

261,347

277,263

Revenue

45,182

60,521

78,882

87,878

91,275

Impairments

(7,611)

(12,194)

(19,434)

(22,918)

(22,861)

Ratios

Net receivables growth

36%

33%

30%

4%

6%

Revenue as % average receivables

35.9%

35.7%

35.5%

34.3%

33.9%

P&L loan loss provision as % revenue

(16.8%)

(20.1%)

(24.6%)

(26.1%)

(25.0%)

Risk adjusted yield on average receivables

29.9%

28.5%

26.7%

25.3%

25.4%

P&L loan loss provision as % avg receivables

(6.1%)

(7.2%)

(8.7%)

(8.8%)

(8.5%)

Bridging Finance

Net loans end of period

10,841

18,100

30,000

Interest/fee revenue

899

2,825

4,660

Loan loss provision

(162)

(237)

(396)

Ratios

Interest/fee revenue % of average receivables

24.9%

18.3%

19.0%

P&L loan loss provision % avg receivables

(4.5%)

(1.5%)

(1.6%)

Group

Accounts receivable

145,141

193,529

262,056

279,447

307,263

Revenue

45,182

60,521

79,781

90,703

95,934

Source: S&U, Edison Investment Research

Exhibit 2 summarises the headline numbers from our estimates. In addition to the P&L items, we have changed our dividend assumptions to align them with earnings and the company’s indication that it will return to a twice-covered dividend for the full year (FY19).

Exhibit 2: Changes to estimates

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

2019e

91.1

90.7

-0.4%

34.5

34.3

-0.5%

231.4

230.1

-0.5%

118.0

116.0

-1.7%

2020e

100.1

95.9

-4.1%

38.3

36.5

-4.7%

256.6

244.6

-4.7%

130.5

122.5

-6.1%

Source: Edison Investment Research

Valuation

Our peer comparison table (Exhibit 3) includes a number of companies that are involved in non-standard lending or have motor finance as one of their activities. S&U trades on calendar year 2018 and 2019 P/Es above the averages but within the range of values. It has an above-average yield. The ROE is above the group average, whereas the price-to-book is only slightly higher than average.

While our estimates have been reduced, we still expect the ROE to be above 17% for both FY19 and FY20. Factoring an assumed cost of equity of 10%, long-term growth of 4% and an ROE of 17% into an ROE/COE model would give a value of 2,800p (unchanged). We note that the current share price (2,110p at time of writing) would imply an ROE of 13.8%, all else equal, which is similar to S&U’s recent low point, recorded in FY09.

Exhibit 3: Peer comparison

Price (p)

Market cap
(£m)

P/E 2018
(x)

P/E 2019
(x)

Yield
(%)

ROE
(%)

P/BV
(x)

S&U

2,110

255

9.3

8.7

5.0

16.7

1.6

1PM

49

43

6.2

N/A

1.3

13.0

0.9

Close Brothers

1,451

2,211

10.4

10.0

4.3

16.3

1.6

OneSavings Bank

373

918

6.4

6.0

3.4

25.5

1.6

PCF Group

37

80

11.1

8.6

0.8

10.3

1.8

Provident Financial

520

1,326

9.6

7.8

0.0

14.0

2.0

Secure Trust Bank

1,395

260

7.7

6.5

5.7

8.9

1.0

Peer average

8.6

7.8

2.6

14.6

1.5

Source: Refinitiv, Edison Investment Research. Note: P/Es are adjusted to calendar years. Priced at 6 February 2019.

Exhibit 4: Financial summary

£'000s

2016

2017

2018

2019e

2020e

Year end 31 January

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

45,182

60,521

79,781

90,703

95,934

Impairments

(7,611)

(12,194)

(19,596)

(23,155)

(23,257)

Other cost of sales

(8,980)

(12,871)

(17,284)

(17,373)

(18,515)

Administration expenses

(7,131)

(8,332)

(9,629)

(11,017)

(11,512)

EBITDA

 

 

21,460

27,124

33,272

39,158

42,650

Depreciation

 

 

(209)

(253)

(294)

(359)

(399)

Op. profit (incl. share-based payouts pre-except.)

 

 

21,251

26,871

32,978

38,799

42,251

Exceptionals

0

0

0

0

0

Non-recurring items

0

0

0

0

0

Investment revenues / finance expense

(1,782)

(1,668)

(2,818)

(4,473)

(5,769)

Profit before tax (FRS 3)

 

 

19,469

25,203

30,160

34,326

36,482

Profit before tax (norm)

 

 

19,469

25,203

30,160

34,326

36,482

Tax

(3,583)

(4,861)

(5,746)

(6,521)

(6,932)

Discontinued business after tax

53,299

Profit after tax (FRS 3)

 

 

69,185

20,342

24,414

27,805

29,550

Profit after tax (norm)

 

 

15,886

20,342

24,414

27,805

29,550

Average Number of Shares Outstanding (m)

12.0

12.0

12.1

12.1

12.1

Diluted EPS (p)

 

 

576.5

169.1

202.4

230.1

244.6

EPS - normalised (p)

 

 

132.4

169.1

202.4

230.1

244.6

Dividend per share (p)

201.0

91.0

105.0

116.0

122.5

EBITDA margin (%)

47.5%

44.8%

41.7%

43.2%

44.5%

Operating margin (before GW and except.) (%)

47.0%

44.4%

41.3%

42.8%

44.0%

Return on equity

15.2%

15.2%

16.7%

17.5%

17.1%

BALANCE SHEET

Non-current assets

 

 

103,653

138,004

181,015

190,049

208,845

Current assets

 

 

61,903

57,763

84,178

113,638

141,319

Total assets

 

 

165,556

195,767

265,193

303,686

350,165

Current liabilities

 

 

(6,850)

(17,850)

(7,927)

(7,179)

(7,339)

Non-current liabilities inc pref

(30,450)

(38,450)

(104,450)

(131,202)

(162,086)

Net assets

 

 

128,256

139,467

152,816

165,305

180,740

NAV per share (p)

1,084

1,177

1,276

1,380

1,509

CASH FLOW

Operating cash flow

 

 

(16,017)

(27,431)

(43,418)

8,115

2,478

Net cash from investing activities

80,716

(308)

(1,040)

(588)

(588)

Dividends paid

(23,090)

(9,548)

(11,377)

(13,084)

(14,336)

Other financing (excluding change in borrowing)

55

21

12

(3)

(16)

Net cash flow

 

 

41,664

(37,266)

(55,823)

(5,559)

(12,462)

Opening net (debt)/cash

 

 

(53,565)

(11,901)

(49,167)

(104,990)

(110,549)

Closing net (debt)/cash

 

 

(11,901)

(49,167)

(104,990)

(110,549)

(123,011)

Source: S&U accounts, Edison Investment Research. Note: FY16 dividend per share includes exceptional payment of 125p.


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This report has been commissioned by S&U and prepared and issued by Edison, in consideration of a fee payable by S&U. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by S&U and prepared and issued by Edison, in consideration of a fee payable by S&U. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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