Encouraging year-end update

S&U 12 February 2020 Update
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S&U

Encouraging year-end update

FY20 trading update

Financial services

12 February 2020

Price

2,380p

Market cap

£285m

Group debt (£m) at January 2020

118

Shares in issue

12.1m

Free float

26%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.3

13.3

11.2

Rel (local)

13.3

9.9

4.0

52-week high/low

2440.00p

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 restricting their access to mainstream products. It has over 64,000 customers. The Aspen property bridging business has moved beyond the pilot stage and is expanding its loan book.

Next events

FY20 results

24 March 2020

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 update signalled that FY20 results are set to be in line with management expectations. It is encouraging that there has been a post-election improvement in transactions at both Advantage and Aspen, while used-car prices have stabilised or increased recently. Our estimates are unchanged and the shares trade on a sub-10x P/E and yield of 5%.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/18

79.8

30.2

202.4

105.0

11.8

4.4

01/19

89.2

34.6

232.0

118.0

10.3

5.0

01/20e

97.5

35.5

239.3

124.0

9.9

5.2

01/21e

106.0

39.0

261.7

128.0

9.1

5.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY20 trading statement

In addition to indicating ‘in-line’ expected FY20 results in March, S&U reported that Advantage motor finance ended the year with net receivables of c £280m (+8% vs FY19) and new transactions of 23,300 (+11%), both similar to our estimate. Nothing was added to the December comment on risk-adjusted yield (25.2%) so this is likely to have been similar at the year end, with further benefits of the tightening of credit criteria likely to flow through this year. At Aspen property bridging, repayments have improved, with £15m received in Q420. This contributed to a reduction in gross debt from £132m in December to £118m at year end leaving significant headroom for growth at both Advantage and Aspen. The second interim dividend is increased to 36p (35p) giving a total to date of 70p (+4.5%).

Outlook

As we show overleaf, UK consumer confidence improved following the general election while unemployment remains at historically low levels. The rate of redundancies did increase during 2019 but remains subdued and has stabilised in the more recent readings (to November). These trends are broadly supportive for Advantage and taken together with the relative resilience of the used car market (9M19 sales down less than 1%) are supportive of the group’s expectation of another record result in FY21 for Advantage. The improved level of repayments at Aspen is likely to result in a lower year-end loan book than we had assumed (we estimate c £20m vs £28m); while this makes our estimated average FY21 lending and revenue levels more ambitious, the earnings impact of a shortfall is unlikely to be material. Stronger collections have increased confidence in the prospects for the business and we expect further investment (on appropriate criteria) to expand the loan book to a more material size over several years.

Valuation

S&U trades on P/E and price to book multiples at a modest premium to its peer group average (see page 3) but earns a higher ROE and offers an FY20e yield of over 5%.

Background charts

As noted earlier, we monitor UK consumer confidence and redundancy and unemployment measures as indicators for the potential behaviour of the Advantage customer base. While consumer confidence is still below its high in 2015 (GFK index, Exhibit 1), the latest figure, for January, is noticeably above the average level seen in 2019. The level of unemployment (regarded as a lagging indicator) was stable in 2019 at around 3.8%, whereas the rate of redundancies (per 1,000) increased to 4.3 by September then stabilised with the November reading being 4.2.

Exhibit 1: GFK UK consumer confidence indicator

Exhibit 2: UK redundancies and unemployment

Source: Bloomberg (last value January 2020)

Source: Bloomberg (last value November 2019)

Exhibit 1: GFK UK consumer confidence indicator

Source: Bloomberg (last value January 2020)

Exhibit 2: UK redundancies and unemployment

Source: Bloomberg (last value November 2019)

The trend in the value of used-car finance through dealerships is shown in Exhibit 3. Growth has been at a lower rate than in earlier periods, but for 2019 to end November the value and volume of loans increased by 4.4% and 1.8% y-o-y respectively against the background of overall used-car transactions being virtually unchanged.

Exhibit 4 shows the level and year-on-year change of dealer part-exchange prices at BCA auctions. Reduced prices realised for recovered vehicles were referenced in S&U’s December update as a small negative but, in tune with the BCA data, it now notes prices have stabilised or even increased. It quotes Motor Finance magazine’s report of an overall increase in used car prices of 6.4% in 2019 while auction house Aston Barclay indicates that all segments saw price increases between Q3 and Q4 with the dealer exchange category (closest to the value of vehicle financed by Advantage) seeing the largest increase at 8.5%.

Exhibit 3: Used car finance through dealerships

Exhibit 4: BCA auction prices, dealer part-exchange

Source: Finance and Leasing Association. Note: By value.

Source: BCA, Edison Investment Research

Exhibit 3: Used car finance through dealerships

Source: Finance and Leasing Association. Note: By value.

Exhibit 4: BCA auction prices, dealer part-exchange

Source: BCA, Edison Investment Research

Valuation

An updated version of our peer comparison table is shown below. This includes companies with an exposure to motor finance and non-standard lending. S&U trades modestly above the average P/Es for calendar years 2019 and 2020. Its historical ROE is above average and, on our estimates, will remain close to 17% for both prospective years; meanwhile the price-to-book multiple is only slightly above the average value. The dividend yield of 5% is above average.

Exhibit 5: Peer comparison

Price
(p)

Market cap
(£m)

P/E 2019
(x)

P/E 2020
(x)

Yield
(%)

ROE
(%)

P/BV
(x)

S&U

2,380

288

10.0

9.2

5.0

17.6

1.7

Close Brothers

1,450

2,188

10.9

10.7

4.6

14.9

1.6

PCF Group

36

90

9.4

7.2

1.1

12.6

1.5

Provident Financial

477

1,204

9.0

7.9

2.1

16.1

1.7

Secure Trust Bank

1,600

297

7.8

6.6

5.2

12.7

1.2

Peer average

9.3

8.1

3.2

14.1

1.5

Source: Refinitiv, Edison Investment Research. Note: P/Es adjusted to calendar years. Priced 12 February 2020.

For reference we show the recent share price performance for the peer group. Following a positive response to the trading update S&U has performed ahead of the average for all the periods shown, while still being slightly shy of its 12 month high.

Exhibit 6: Peer group share price performance

1 month

3 months

1 year

YTD

From 12m high

S&U

12.3

13.3

11.2

12.8

-3.3

Close Brothers

-9.0

2.2

-0.5

-9.3

-12.8

PCF Group

5.9

0.0

-1.1

2.9

-7.3

Provident Financial

14.0

9.1

-5.6

4.2

-25.1

Secure Trust Bank

1.3

12.7

15.9

0.0

-7.5

Average

3.0

6.0

2.2

-0.5

-13.2

Source: Source: Refinitiv, Edison Investment Research


Exhibit 7: Financial summary

£'000s

2016

2017

2018

2019

2020e

2021e

Year end 31 January

PROFIT & LOSS

Revenue

 

 

45,182

60,521

79,781

89,215

97,535

105,993

Impairments

(7,611)

(12,194)

(19,596)

(23,186)

(24,604)

(25,859)

Other cost of sales

(8,980)

(12,871)

(17,284)

(15,751)

(19,725)

(21,199)

Administration expenses

(7,131)

(8,332)

(9,629)

(10,763)

(12,266)

(13,461)

EBITDA

 

 

21,460

27,124

33,272

39,515

40,940

45,474

Depreciation

 

 

(209)

(253)

(294)

(414)

(475)

(555)

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

 

 

21,251

26,871

32,978

39,101

40,465

44,919

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)

(4,962)

(5,911)

Profit before tax (FRS 3)

 

 

19,469

25,203

30,160

34,560

35,503

39,008

Profit before tax (norm)

 

 

19,469

25,203

30,160

34,560

35,503

39,008

Tax

(3,583)

(4,861)

(5,746)

(6,571)

(6,610)

(7,411)

Discontinued business after tax

53,299

Profit after tax (FRS 3)

 

 

69,185

20,342

24,414

27,989

28,893

31,596

Profit after tax (norm)

 

 

15,886

20,342

24,414

27,989

28,893

31,596

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

239.3

261.7

EPS - normalised (p)

 

 

132.4

169.1

202.4

232.0

239.3

261.7

Dividend per share (p)

201.0

91.0

105.0

118.0

124.0

128.0

EBITDA margin (%)

47.5%

44.8%

41.7%

44.3%

42.0%

42.9%

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

47.0%

44.4%

41.3%

43.8%

41.5%

42.4%

Return on equity

15.2%

15.2%

16.7%

17.6%

16.8%

16.8%

BALANCE SHEET

Non-current assets

 

 

103,653

138,004

181,015

185,383

211,443

231,955

Current assets

 

 

61,903

57,763

84,178

95,430

108,995

121,301

Total assets

 

 

165,556

195,767

265,193

280,813

320,438

353,256

Current liabilities

 

 

(6,850)

(17,850)

(7,927)

(6,722)

(7,784)

(8,064)

Non-current liabilities inc pref

(30,450)

(38,450)

(104,450)

(108,724)

(132,801)

(148,701)

Net assets

 

 

128,256

139,467

152,816

165,367

179,853

196,491

NAV per share (p)

1,084

1,177

1,276

1,375

1,496

1,634

CASH FLOW

Operating cash flow

 

 

(16,017)

(27,431)

(43,418)

10,530

(4,334)

2,276

Net cash from investing activities

80,716

(308)

(1,040)

(785)

(625)

(860)

Dividends paid

(23,090)

(9,548)

(11,377)

(13,080)

(14,453)

(15,088)

Other financing (excluding change in borrowing)

55

21

12

14

7

0

Net cash flow

 

 

41,664

(37,266)

(55,823)

(3,321)

(19,405)

(13,672)

Opening net (debt)/cash

 

 

(53,565)

(11,901)

(49,167)

(104,990)

(108,311)

(127,716)

Closing net (debt)/cash

 

 

(11,901)

(49,167)

(104,990)

(108,311)

(127,716)

(141,389)

Source: S&U, 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 research department of Edison 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.

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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 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “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 Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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.

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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

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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 research department of Edison 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 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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

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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