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Adjusting to prevailing conditions

S&U 4 April 2019 Outlook
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S&U

Adjusting to prevailing conditions

FY19 results

Financial services

4 April 2019

Price

1820p

Market cap

£217m

Net debt end-January 2019 (£m)

108.3

Shares in issue

12.0m

Free float

26%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.8)

(17.3)

(22.9)

Rel (local)

(10.1)

(25.4)

(26.2)

52-week high/low

2790.00p

1767.50p

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 that 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

AGM

May 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 FY19 results were close to expectations and changes to our prospective numbers are limited. The tightening of motor finance lending criteria and more modest receivables growth are prudent and should help protect prospective profitability at a point where there is considerable macro uncertainty. Small as yet, the property bridging business is developing well and has the potential to augment growth usefully in future.

Year end

Revenue (£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/18

79.8

30.2

202.4

105.0

9.0

5.8

01/19

89.2

34.6

232.0

118.0

7.8

6.5

01/20e

94.7

36.9

247.8

122.5

7.3

6.7

01/21e

103.8

40.3

270.8

124.6

6.7

6.8

Note: PBT and EPS (fully diluted) are reported.

FY19 results

S&U reported full year results broadly in line with our estimates. Revenue of £89.2m and pre-tax profit of £34.6m were up12% and 15% vs FY18. Fully diluted EPS increased by a similar amount to 232p. With a final payment of 51p vs 45p the full year dividend is 12% ahead at 118p. As foreshadowed in previous updates from the company, loan growth at the main Advantage motor finance business has slowed as a result of tightening of credit criteria to address increased impairment and a higher level of competition. The number of transactions was 14% lower than the prior year and motor finance receivables ended the year at £259m (+4% y-o-y but below the H1 and December levels). The Aspen property bridging business is making good progress and had a loan book of over £18m vs £11m at the beginning of the year. It made a pre-tax profit contribution of £0.8m vs a loss of £0.3m.

Background and outlook

The market for used cars has historically been more stable than new car registrations and used car finance has grown above the rate of used car transactions. Prospectively the market may well grow at a slower rate but Advantage has a small market share and still receives a high and growing level of applications. It has tightened its credit criteria and over time this should contain the level of impairments defending/improving the risk-adjusted yield. Greater competition has also contributed to tempered growth expectations, but Advantage is maintaining pricing discipline and given its experience in the market is well-placed to respond by finetuning its offering and focusing on segments offering favourable risk-adjusted returns. Aspen meanwhile continues to develop strongly from a small base but with a conservative approach to credit risk.

Valuation: Opportunity provided by price weakness

Our estimates for FY20 are little changed and we look for S&U to generate a return on equity of over 17%. An ROE/COE model suggests the market is factoring in a return of only 12% at the current price, while, following price weakness, the prospective P/E is below average compared with our selected peers (see page 9).

A tried and tested company with a new venture

S&U’s origins lie in a business founded by the chairman’s grandfather. That evolved into a home collected credit company and, nearly 20 years ago, this was joined by Advantage Finance, a nonprime motor finance business. The sale of the home collected credit business to Non Standard Finance in 2015 for £82.5m represented a significant change for the group and provided the means to finance a £15m special dividend and to invest in the continued strong growth at Advantage and subsequently the pilot stage of a new property bridging business (Aspen Bridging).

Sustained profitable growth in non-prime motor finance

Advantage Finance was formed in 1999 and is based in Grimsby with c 150 employees. The majority of the management team has been with the company since launch. Advantage has a strong growth record and even after FY19, which saw more muted growth, the five-year compound growth in net customer receivables has been 29% to £259m at the end of January 2019. It has over 59,000 live customers and recorded more than 21,000 new transactions in FY19. Advantage focuses on the non-prime area of the market and 90% of its lending is through over 40 brokers, with 5% each from dealerships and existing customers. The broker sourced business divides 50/40 between internet and dealership brokers. S&U has relationships with the largest UK brokers including names such as Carfinance247, Zuto, Evolution Funding, Jigsaw and Auto Union Finance. This gives access to both large dealership networks and smaller local dealers.

Almost all the loan applications are submitted to the Advantage web-based system, which provides immediate in-principle lending decisions. The in-house IT capability at Advantage (about 10% of the staff) is an important enabler for the business as it helps maintain a high-speed response to loan applications and rapid adjustments to systems in response to business requirements. A recent example is the integration of credit data from a new provider that will allow Advantage to respond better to the increased risk posed by relatively new high-cost short-term credit products.

Most loans range from £5,000 to £7,000, with a maximum loan amount of £12,000; the average advance in FY19 was c £6,100. The average original term was 50 months with a flat interest rate of 17.9% (c £11,000 repayable including interest). The provisional approval rate for loan applications in the last financial year was approximately 23%, with c 230,000 out of one million applications approved. The 21,000 that actually signed up were therefore equivalent to about 9% of approvals or 2% of original applications. The small ratio of deals signed in part reflects buyers’ increased use of the internet to source finance before shopping for a car and is not onerous for Advantage given the automation of responses to applications. Advantage’s Dealflo e-signature system has helped to support the sign-up rate following approval, by guiding customers through terms and conditions and verifying their digital signatures.

Advantage has achieved 19 years of consecutive profit growth, reflecting growth in the loan book paired with successful credit control, underpinned by the continuous refinement of a bespoke underwriting and scoring system, developed in conjunction with Experian and referencing a range of data sources. Exhibit 1 shows the development in receivables, revenue and profit margin at Advantage since 2007. As can be seen, growth accelerated in the post financial crisis period (notably from 2013) when limited availability of credit created a particularly favourable environment with customers who might previously have been served by the incumbent banks migrating to specialist providers such as Advantage. Revenue and margin benefited subsequently with the latter rising to more than 40% for four years followed by a moderation more recently as a result of rising broker commission and impairments, and, to a lesser extent, the withdrawal from the sale of gap insurance (2015). Not shown, the return on capital for Advantage has followed a similar pattern, peaking at over 20% and then contracting to a still healthy level just above 15% in FY19.

Exhibit 1: Motor receivables and revenue

Source: S&U, Edison Investment Research

Property bridging finance: A diversifying source of growth

Aspen Bridging launched as a pilot project in February 2017 to test the viability of developing property bridging finance as a diversifying activity and alternative source of growth for the group. In November 2018 S&U announced that it would move on from the pilot stage and invest further in the business to take its loan book to c £30m during 2019.

Loans are made for home refurbishment or investment with an original term of nine months; facilities have an option for Aspen to extend the term by two months and repayment is financed by sale or remortgaging. Loans are all unregulated (not owner-occupier) and are secured with a first charge. S&U notes that it is addressing a market niche financing projects that larger institutions would find difficult to service with the speed and flexibility Aspen can offer.

Aspen follows a cautious underwriting approach with a process that includes third-party legal and valuation input, together with a site meeting with each customer by a member of the 11-strong Aspen team. Since launch the average maximum loan to value has been 71%. At end FY19 the loan book stood at £18.3m and during the year there were 62 transactions with a gross average loan size of £375,000.

FY19 results commentary

S&U’s overall results were similar to our expectations with revenue and pre-tax profit slightly above and slightly below our forecast figures respectively. Prominent features included the expected slowdown in receivables growth at Advantage and a further tick up in the level of impairments relative to revenues and receivables while Aspen has continued to grow rapidly following its move beyond the pilot stage. Exhibit 2 sets out a summary profit and loss comparison with prior years. Key points from the results are noted below with percentage changes versus FY18 unless stated.

Year-end motor finance receivables increased by 3% while the average level of receivables was up 15%, reflecting the growth that took place in FY18. The property bridging loan book increased by 68%.

At a group level revenue was up 12%, but this would have been 15% if adjusted for the introduction of IFRS 16. Advantage revenue increased by nearly 10%.

Impairments increased 18% reflecting pressure on some customer incomes and the impact of newer high-cost short-term credit (HCSTC) products in some cases. At Advantage the impairment charge was equivalent to 26.6% of revenue versus 24.6%. Aspen has experienced one default loss so far, which was of default interest only (not capital or term interest), and the impairment provision remains low at 7.2% of revenue.

The 9% reduction in cost of sales reflected a lower number of Advantage transactions (14%) partly offset by a higher average commission payment.

Administrative expenses increased at a similar rate to revenue (+12%) leaving a pre-tax profit increase of nearly 15% to £34.6m.

Segmentally, Advantage pre-tax profit was 11% higher at £33.6m (£30.2m), while, as noted earlier, Aspen moved from a loss of £0.3m to a profit of £0.8m. There was a marginal central profit contribution reflecting finance income net of costs.

Earnings per share increased by nearly 15% to 232p (fully diluted basis) and a final dividend of 51p was proposed, giving a total for the year of 118p (+12%).

Exhibit 2: P&L summary FY19 results

£000 unless stated

FY17

FY18

FY19

FY19 % change

Motor finance receivables

193,529

251,215

258,810

3.0

Number of new motor loans

20,042

24,518

21,053

-14.1

Bridging loans at year end

10,841

18,253

68.4

Revenue

Motor finance

60,521

78,882

86,372

9.5

Property bridging

0

899

2,843

216.2

Total

60,521

79,781

89,215

11.8

Impairments

Motor finance

(12,194)

(19,434)

(22,980)

18.2

Property bridging

0

(162)

(206)

27.2

Total

(12,194)

(19,596)

(23,186)

18.3

Other cost of sales

(12,871)

(17,284)

(15,751)

-8.9

Administration expenses

(8,332)

(9,629)

(10,763)

11.8

EBITDA

27,124

33,272

39,515

18.8

Depreciation

(253)

(294)

(414)

40.8

Operating profit / loss

26,871

32,978

39,101

18.6

Finance expense

(1,668)

(2,818)

(4,541)

61.1

Pre-tax profit

25,203

30,160

34,560

14.6

Tax

(4,861)

(5,746)

(6,571)

14.4

Net profit

20,342

24,414

27,989

14.6

EPS fully diluted (p)

169.1

202.4

232.0

14.6

Dividend per share (p)

91.0

105.0

118.0

12.4

Source: S&U, Edison Investment Research

Looking more closely at the Advantage result, Exhibit 3 shows the evolution of revenues and impairments as a percentage of receivables since 2007. As noted earlier there was a period of higher yields following the financial crisis followed by some erosion as competitive pressures increased in response to the attractive returns available. The revenue yield in FY19 was lower at 33.3% compared with 35.1% for FY18, in part reflecting changes in mix between customer/vehicle risk categories. Advantage has indicated that the flat interest rate charged ranges between approximately 12% and 25% for its top and bottom categories corresponding to the risk exposure for each. The target return on capital for all categories is the same at 16–18%, although in practice the outcome will vary positively and negatively subject to the performance of the loans once issued. Impairments as a percentage of receivables were slightly higher at 8.7% versus 9.0%. The level of impairments is higher than the group hoped at this stage with the difference primarily reflecting the impact of loans taken on before credit criteria were tightened, including the adverse effect on some customers of HCSTC products, as noted earlier. The combination of lower revenue yield and a higher impairment percentage reduced the risk-adjusted yield (revenue less impairments as a percentage of average receivables) and this is shown in Exhibit 4. On the same chart we can see that the profit margin was slightly higher, with the lower cost of sales resulting from the reduction in number of transactions being the driver here.

Exhibit 3: Revenue and impairment, % of receivables

Exhibit 4: Risk-adjusted yield and profit margin

Source: S&U, Edison Investment Research

Source: S&U, Edison Investment Research

Exhibit 3: Revenue and impairment, % of receivables

Source: S&U, Edison Investment Research

Exhibit 4: Risk-adjusted yield and profit margin

Source: S&U, Edison Investment Research

Exhibit 5 shows how Advantage’s average internal customer credit score and the flat interest rate by period of origination has moved since FY12. This shows an offset between pricing and risk with rates rising as the mix was adjusted towards lower credit scores. The reduction in average credit score shown here also reflects the settlement of most of the high-scoring FY12–14 originations. Prospectively we would expect the score to increase following the tightening of credit criteria and a deliberate shift away from the lower end of highest-risk category (these applicants are also seen as more likely to be vulnerable to economic disruption). The arrears profile (not shown) saw a decline in the percentage of receivables where payments are up to date (down from 83.3% to 79.2%) much of which is attributable to the lower level of new business (new loans start up to date). While the impairment and arrears trends are less favourable than hoped last year, there are signs that the implementation of tighter criteria is beginning to take effect. One of the metrics Advantage monitors is the percentage of borrowers paying their first repayment on time and this began to improve in mid-2017. The measure has a good correlation with outcomes (for example the level of eventual write offs), which, if maintained, should signal a progressive improvement in Advantage’s rate of impairment.

Exhibit 5: Customer credit score and flat interest rates

Exhibit 6: Cost of sales and original loan term

Source: S&U. Note: Internal credit quality score and flat interest rate by year of origination.

Source: S&U. Note: Cost of sales represents acquisition costs mainly arising from commission paid to brokers.

Exhibit 5: Customer credit score and flat interest rates

Source: S&U. Note: Internal credit quality score and flat interest rate by year of origination.

Exhibit 6: Cost of sales and original loan term

Source: S&U. Note: Cost of sales represents acquisition costs mainly arising from commission paid to brokers.

Exhibit 6 illustrates the post-financial crisis normalisation of competitive pressure and the increasing importance of internet broking. The original duration of loans has increased over the period shown, which helps attract customers as it reduces the monthly payments but does imply some increase in risk for the lender (potentially compensated for by the interest rate). The small reduction last year suggests that this trend may have run its course. The chart also shows a rise in the cost of sales per loan. After falling between FY12 and FY15, this has now increased, largely reflecting the increase in payments to the brokers that originate most of the loans. The increasing role of the larger internet brokers and competitor behaviour contribute to this trend and S&U has signalled that it may increase commission payments further in order to generate renewed growth in receivables.

Market background and outlook

Macroeconomic and political uncertainty remains a prominent feature of the UK backdrop. As an illustration of recent changes in economic expectations, the Office of Budget Responsibility (OBR) in its March report reduced its 2019 UK GDP forecast by 0.4 points to 1.2% followed by an unchanged 1.4% for 2020 (assuming an orderly Brexit). Unemployment is an important indicator for the health of consumer lending and tends to lag GDP changes. Given its assumptions the OBR does not flag a rise in unemployment in its 2019–23 forecast period (stable at c 4%). The level of redundancies, which has trended down since the financial crisis, remains at a relatively low level (see Exhibit 7) although all key economic metrics could be at risk if Brexit-related disruption did become a significant factor. Consumer confidence, as measured by the GFK index (Exhibit 8), has declined since 2015 although this trend has been less marked recently despite the lack of a resolution of the political impasse over Brexit.

Exhibit 7: UK redundancies and unemployment

Exhibit 8: GFK UK consumer confidence indicator

Source: ONS

Source: Bloomberg

Exhibit 7: UK redundancies and unemployment

Source: ONS

Exhibit 8: GFK UK consumer confidence indicator

Source: Bloomberg

The overall number of transactions in the used car market has fallen modestly from a peak level in 2016 (Exhibit 9) but the number of transactions financed through dealerships, as reported by the Finance and Leasing Association (FLA), has increased significantly. The average finance per transaction has also risen at a compound rate of 3% since 2009. The combination of a rising share of transactions financed and the increase in the average level of finance per transaction has generated 14% compound growth in used-car finance through dealerships between 2009 and 2018 (Exhibit 10).

Exhibit 9: UK used-car market volume, % financed

Exhibit 10: Used-car finance through dealerships

Source: SMMT, Finance and Leasing Association

Source: Finance and Leasing Association

Exhibit 9: UK used-car market volume, % financed

Source: SMMT, Finance and Leasing Association

Exhibit 10: Used-car finance through dealerships

Source: Finance and Leasing Association

Exhibit 11 shows the recent trend in used car transactions and new car registrations, illustrating the point that the new market tends to be more volatile than used transactions. The same is true for car finance as illustrated by FLA data in Exhibit 12

Exhibit 11: UK car market trends (volume)

Exhibit 12: Car finance through dealerships (value)

Source: SMMT

Source: Finance and Leasing Association

Exhibit 11: UK car market trends (volume)

Source: SMMT

Exhibit 12: Car finance through dealerships (value)

Source: Finance and Leasing Association

S&U notes that the level of prices achieved on cars it sends to auction has been resilient and this is in line with figures published by BCA Marketplace on its auction prices. For Advantage, a reduction in prices would be a negative (potentially triggering higher early redemptions and lower realisations on repossessed vehicles), but the level of depreciation that has already been incurred on the cars for which Advantage is providing finance reduces the sensitivity to a weakening in prices. In the event of a marked economic slowdown, a more relevant risk would be rising redundancies that could prompt an increase in defaults.

On a regulatory front, the Financial Conduct Authority (FCA) published its final report on its work on the motor finance market in March, following an update report a year earlier. Since the first report the FCA’s focus has been on the areas of greatest potential harm identified: (1) risks associated with the structure of commissions paid to brokers, in particular where this is related to the rate of interest charged; (2) the nature and timing of information given to customers; and (3) the efficacy of affordability assessments. As part of its work the FCA analysed loan data from 20 providers and carried out a mystery shopping exercise; S&U was one of these providers.

On commissions, Advantage operates a flat fee policy and is therefore not involved in the arrangements about which the FCA is concerned. On information provided to customers, Advantage has secured a Crystal Mark for its communications and notes that customers have to view an explanatory video prior to proceeding with a loan. Advantage’s affordability assessment has for some time been separate from the credit scoring process and uses online information in the first instance, which is then checked before a loan is made. Following the report, Advantage indicated that it was very comfortable with the conclusions reached by the FCA.

For Advantage the resilience of volumes in the used car finance market, while subject to economic risks, seems likely to sustain a high level of loan applications. The continuing work finetuning credit criteria and identifying an appropriate risk profile to achieve attractive returns should help the company to contribute to management’s aim of achieving steady sustainable earnings growth for the group. At Aspen the business is still at an early stage addressing a niche within a large and growing market. S&U points to a MINTEL survey that suggests bridging lending may grow from c £7.5bn per annum currently to over £10bn by 2021. The group’s conservative approach should ensure that growth is balanced, with a controlled approach to pricing and risk exposure in a market in which the level of competition can ebb and flow.

In the next section we set out changes in our estimates and the group’s financial position.

Financials

Changes in the headline numbers for FY20 together with new numbers for FY21 are shown below. The FY19 result was close to expectations and the changes in our FY20 forecasts are small. On our estimates, earnings per share growth would be 7% and 9% for the two forecast years.

Exhibit 13: Changes to estimates

Year-end
January

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

FY19

90.7

89.2

-1.6%

34.3

34.6

0.7%

230.1

232.0

0.8%

116.0

118.0

1.7%

FY20e

95.9

94.7

-1.3%

36.5

36.9

1.1%

244.6

247.8

1.3%

122.5

122.5

0.0%

FY21e

103.8

N/A

40.3

N/A

270.8

N/A

124.6

N/A

Source: Edison Investment Research. Note: For 2019 ‘old’ = estimate, and ‘new’ = actual.

The next table gives details of our assumptions for the Advantage and Aspen businesses. In the motor business we have allowed for receivables growth of 7% and 8% for FY20 and FY21, respectively, and look for a similar percentage level of impairments followed by a decline. Bridging receivables are assumed to reach £30m in the current year followed by £45m.

Exhibit 14: Segmental analysis

£000

2017

2018

2019

2020e

2021e

Motor Finance

Net accounts receivable

193,529

251,215

258,810

277,186

299,804

Revenue

60,521

78,882

86,372

90,118

96,897

Impairments

(12,194)

(19,434)

(22,980)

(23,971)

(25,193)

Ratios

Net receivables growth

33%

30%

3%

7%

8%

Revenue as % avg receivables

35.7%

35.5%

33.9%

33.6%

33.6%

P&L loan loss provision as % revenue

(20.1%)

(24.6%)

(26.6%)

(26.6%)

(26.0%)

Risk adjusted yield on average receivables

28.5%

26.7%

24.9%

24.7%

24.9%

P&L loan loss provision as % avg receivables

(7.2%)

(8.7%)

(8.9%)

(9.0%)

(8.7%)

Bridging Finance

Net loans end of period

10,841

18,253

30,000

45,000

Interest/fee revenue

899

2,843

4,572

6,888

Loan loss provision

(162)

(206)

(302)

(455)

Ratios

Interest/fee revenue % of average receivables

24.9%

18.4%

19.0%

19.0%

P&L loan loss provision % ave receivables

(4.5%)

(1.3%)

(1.3%)

(1.3%)

Group

Accounts receivable

193,529

262,056

277,063

307,186

344,804

Revenue

60,521

79,781

89,215

94,690

103,784

Source: S&U, Edison Investment Research

The segmental cash flow analysis below highlights the major turnaround in cash flow at Advantage as growth has slowed. The business has therefore performed exactly as would be expected, with collections rising strongly from receivables growth in earlier periods and lower advances resulting in the FY18 cash outflow of £42m turning into an inflow of £6m for FY19. Aspen property bridging absorbed £6.5m, which was down on the prior year’s £11m as collections built from a low level. At the group level this left net debt only modestly higher at £108m compared with £105m. Following the year end, committed funding facilities have increased from £135m to £160m through a £25m five-year revolving facility from RBS, which provides additional headroom. On our estimates, net debt could rise to c £143m by end FY21 with net debt/equity at 72%.

Exhibit 15: Cash flow analysis

£m

FY16

FY17

FY18

FY19

Motor Finance

Advances

(93.2)

(121.6)

(152.2)

(129.2)

Monthly collections

71.7

95.0

118.8

138.1

Settlement collections

15.0

19.9

24.6

27.9

Debt recovery

4.7

6.9

9.9

15.5

Overheads/interest

(16.6)

(22.7)

(29.4)

(30.4)

Corporation tax

(3.8)

(4.6)

(5.4)

(5.5)

Dividend

(4.7)

(6.1)

(8.2)

(10.5)

Motor Finance inflow /outflow

(26.9)

(33.2)

(41.9)

5.9

Property Bridging

Gross advances

(13.3)

(23.1)

Retention collections

1.5

2.5

Collections

1.7

14.0

Debt recovery

1.8

Overheads/interest

(1.1)

(1.7)

Property Bridging outflow

(11.2)

(6.5)

Home credit disposal

82.4

Exceptional dividend

(15.0)

Other inflow/outflow

1.2

(4.1)

(2.7)

(2.4)

Group inflow/outflow

41.7

(37.3)

(55.8)

(3.0)

Opening net debt

53.6

11.9

49.2

105.0

Closing net debt

11.9

49.2

105.0

108.0

Source: S&U, Edison Investment Research. Note: FY19 net debt excludes lease liabilities

Valuation

We have updated our peer comparison table, which includes a selection of companies that are involved in non-standard lending or have motor lending as one of their activities. This shows S&U trading on below-average prospective P/E multiples, while the price to book ratio is just below the average despite a return on equity noticeably above the average. The yield is also above average.

Exhibit 16: Peer comparison

Price
(p)

Market cap
(£m)

P/E 2018
(x)

P/E 2019
(x)

Yield
(%)

ROE
(%)

P/BV
(x)

S&U

1,820

218

7.4

6.8

6.5

17.6

1.3

1PM

43

37

5.3

N/A

1.5

13.0

0.8

Close Brothers

1,508

2,277

10.9

10.5

4.2

16.3

1.7

PCF Group

32

79

9.7

7.2

1.0

10.3

1.6

Provident Financial

505

1,276

9.8

7.9

2.0

25.0

1.8

Secure Trust Bank

1,410

260

8.0

6.8

5.9

8.9

1.1

Peer average

8.8

8.1

2.9

14.7

1.4

Source: Refinitiv, Edison Investment Research. Note: P/Es adjusted to calendar years. Priced at 3 April 2019.

Turning to our ROE/COE model (with unchanged assumptions of a cost of equity of 10% and growth of 4%) and using it to deduce the return on equity assumed by the market at a share price of 1,820p gives a value of 12%. This appears cautious in the context of the return of 17.6% recorded last year and our estimates, which are above 17% for both FY20 and FY21. Factoring in a return on equity of 17%, as in our last note, would give a value of 2,980p compared with 2,800p previously (reflecting the NAV increase of 6.4% since the end of H119). This value would give a prospective P/E of 12x, which would seem ambitious in the context of the peer multiples shown above, but even putting S&U on the average 2019 P/E multiple would still point to c 13% upside.

For reference we include a table showing the recent share price performance for the same peer group in Exhibit 17. This shows that S&U shares have underperformed the peers over all the periods shown. We acknowledge that new business expectations for Advantage have been tempered (we reduced our FY20e EPS by 4.7% in February), but the still-healthy ROE in prospect on our estimates and the valuation comparison above suggest that the relative price weakness may provide an interesting opportunity.

Exhibit 17: Share price performance comparison

% change

1 month

3 months

1 year

YTD

From 12m high

S&U

-6.8

-17.3

-22.9

-14.6

-34.8

1PM

-1.2

2.4

-7.1

3.7

-32.3

Close Brothers

-1.1

4.3

6.4

4.7

-10.3

PCF Group

-4.5

-12.8

-1.3

-12.8

-28.2

Provident Financial

-15.8

-13.9

-25.2

-12.2

-29.5

Secure Trust Bank

8.3

18.7

-27.3

18.5

-33.5

Average

-2.9

-0.3

-10.9

0.4

-26.8

Source: Refinitiv. Note: Priced at 3 April 2019.

Exhibit 18: Financial summary

£000s

2016

2017

2018

2019

2020e

2021e

Year end 31 January

PROFIT & LOSS

Revenue

 

 

45,182

60,521

79,781

89,215

94,690

103,784

Impairments

(7,611)

(12,194)

(19,596)

(23,186)

(24,273)

(25,648)

Other cost of sales

(8,980)

(12,871)

(17,284)

(15,751)

(16,813)

(19,200)

Administration expenses

(7,131)

(8,332)

(9,629)

(10,763)

(11,363)

(12,454)

EBITDA

 

 

21,460

27,124

33,272

39,515

42,241

46,482

Depreciation

 

 

(209)

(253)

(294)

(414)

(555)

(619)

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

 

 

21,251

26,871

32,978

39,101

41,686

45,863

Exceptionals

0

0

0

0

0

0

Non recurring items

0

0

0

0

0

0

Investment revenues / finance expense

(1,782)

(1,668)

(2,818)

(4,541)

(4,821)

(5,581)

Profit before tax (FRS 3)

 

 

19,469

25,203

30,160

34,560

36,865

40,282

Profit before tax (norm)

 

 

19,469

25,203

30,160

34,560

36,865

40,282

Tax

(3,583)

(4,861)

(5,746)

(6,571)

(7,004)

(7,654)

Discontinued business after tax

53,299

Profit after tax (FRS 3)

 

 

69,185

20,342

24,414

27,989

29,861

32,628

Profit after tax (norm)

 

 

15,886

20,342

24,414

27,989

29,861

32,628

Average Number of Shares Outstanding (m)

12.0

12.0

12.1

12.1

12.1

12.1

Diluted EPS (p)

 

 

576.5

169.1

202.4

232.0

247.8

270.8

EPS - normalised (p)

 

 

132.4

169.1

202.4

232.0

247.8

270.8

Dividend per share (p)

201.0

91.0

105.0

118.0

122.5

124.6

EBITDA margin (%)

47.5%

44.8%

41.7%

44.3%

44.6%

44.8%

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

47.0%

44.4%

41.3%

43.8%

44.0%

44.2%

Return on equity

15.2%

15.2%

16.7%

17.6%

17.3%

17.2%

BALANCE SHEET

Non-current assets

 

 

103,653

138,004

181,015

185,383

208,712

234,133

Current assets

 

 

61,903

57,763

84,178

95,430

103,030

115,389

Total assets

 

 

165,556

195,767

265,193

280,813

311,742

349,522

Current liabilities

 

 

(6,850)

(17,850)

(7,927)

(6,722)

(6,896)

(7,126)

Non current liabilities inc pref

(30,450)

(38,450)

(104,450)

(108,724)

(124,024)

(143,724)

Net assets

 

 

128,256

139,467

152,816

165,367

180,822

198,672

NAV per share (p)

1,084

1,177

1,276

1,375

1,504

1,652

CASH FLOW

Operating cash flow

 

 

(16,017)

(27,431)

(43,418)

10,530

568

(4,069)

Net cash from investing activities

80,716

(308)

(1,040)

(785)

(846)

(846)

Dividends paid

(23,090)

(9,548)

(11,377)

(13,080)

(14,592)

(14,964)

Other financing (excluding change in borrowing)

55

21

12

14

0

0

Net cash flow

 

 

41,664

(37,266)

(55,823)

(3,321)

(14,870)

(19,879)

Opening net (debt)/cash

 

 

(53,565)

(11,901)

(49,167)

(104,990)

(108,311)

(123,181)

Closing net (debt)/cash

 

 

(11,901)

(49,167)

(104,990)

(108,311)

(123,181)

(143,060)

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

Contact details

Revenue by geography

S&U, 2 Stratford Court
Cranmore Boulevard, Solihull.
B90 4QT
0121 705 77 77
www.suplc.co.uk

Contact details

S&U, 2 Stratford Court
Cranmore Boulevard, Solihull.
B90 4QT
0121 705 77 77
www.suplc.co.uk

Revenue by geography

Management team

Chairman: Anthony Coombs

Deputy chairman: Graham Coombs

Anthony Coombs joined S&U in 1975 and was appointed managing director in 1999 and chairman in 2008. Between 1987 and 1997 he served as an MP. He is on the executive of the Consumer Credit Association and is a director of a number of companies and charities including chairing the trustees of the National Institute for Conductive Education.

Graham Coombs joined S&U after graduating from the London Business School in 1976. He is responsible for strategic matters.

Group finance director: Chris Redford

MD, Advantage Finance: Guy Thompson

Chris Redford is a chartered accountant with over 10 years’ business experience in the fast-moving consumer goods, food and travel sectors. He was appointed as finance director of Advantage Finance in 1999 and as group finance director from 1 March 2004.

Guy Thompson joined the group in 1999 as managing director of Advantage Finance and has overseen the business growth and profit increases in the business. He has previous experience in banking, finance companies and car dealerships.

Management team

Chairman: Anthony Coombs

Anthony Coombs joined S&U in 1975 and was appointed managing director in 1999 and chairman in 2008. Between 1987 and 1997 he served as an MP. He is on the executive of the Consumer Credit Association and is a director of a number of companies and charities including chairing the trustees of the National Institute for Conductive Education.

Deputy chairman: Graham Coombs

Graham Coombs joined S&U after graduating from the London Business School in 1976. He is responsible for strategic matters.

Group finance director: Chris Redford

Chris Redford is a chartered accountant with over 10 years’ business experience in the fast-moving consumer goods, food and travel sectors. He was appointed as finance director of Advantage Finance in 1999 and as group finance director from 1 March 2004.

MD, Advantage Finance: Guy Thompson

Guy Thompson joined the group in 1999 as managing director of Advantage Finance and has overseen the business growth and profit increases in the business. He has previous experience in banking, finance companies and car dealerships.

Principal shareholders

(%)

Wiseheights

20.15

JS Coombs

15.45

GDC Coombs

13.17

JE Coombs

11.95

AMV Coombs

11.18

M Cole-Fontayne

3.33

S Coombs

2.36

F Coombs

2.36

J E-C Coombs

2.36

Renta 4 Banco

1.89

Companies named in this report

1PM (OPM), Close Brothers (CBG), Private and Commercial Finance (PCF), Provident Financial (PFG), Secure Trust (STB)


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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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United Kingdom

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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

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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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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