S&U — Confident but remaining prudent in approach

S&U (LSE: SUS)

Last close As at 16/07/2024

GBP19.10

−10.00 (−0.52%)

Market capitalisation

GBP233m

More on this equity

Research: Financials

S&U — Confident but remaining prudent in approach

As a specialist lender, S&U is sensitive to the economic background, but in its main motor finance business it has a strong track record of managing and growing through bumpy conditions. The newer property bridging business is maturing and shares a focus on customer service and a conservative underwriting approach. This provides the group with a sound basis for sustainable long-term growth.

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Financials

S&U

Confident but remaining prudent in approach

FY23 results

Financial services

31 March 2023

Price

2,400p

Market cap

£292m

Net debt (£m) at end January 2023

193

Shares in issue

12.2m

Free float

27%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

6.1

15.8

1.7

Rel (local)

10.0

13.7

3.3

52-week high/low

2,510p

1,905p

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 over 65,000 customers. The Aspen property bridging business has been developing, following its launch in early 2017.

Next events

AGM update

25 May 2023

Analysts

Andrew Mitchell

+44 (0)20 3077 5700

Armando Hoxha

+44 (0)20 3077 5700

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

As a specialist lender, S&U is sensitive to the economic background, but in its main motor finance business it has a strong track record of managing and growing through bumpy conditions. The newer property bridging business is maturing and shares a focus on customer service and a conservative underwriting approach. This provides the group with a sound basis for sustainable long-term growth.

Year

end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/22

87.9

47.0

312.7

126.0

7.7

5.3

01/23

102.7

41.4

277.5

133.0

8.6

5.5

01/24e

119.3

42.9

268.4

133.0

8.9

5.5

01/25e

131.9

48.7

300.3

150.0

8.0

6.3

Note: *PBT and EPS are reported. EPS are diluted.

FY23 outcome matches expectations

S&U had a strong final quarter in FY23 and ended the year with net receivables of £421m, an increase of 30% from FY22, resulting in a 22% rise in average receivables. Group revenue increased by 17% to £103m. Pre-tax profit was £41.4m versus £47m in FY22, £18.1m in FY21 and the pre-pandemic level of £35.1m in FY20. In common with other lenders, the Advantage impairment charge was unusually high in FY21, reflecting the pandemic, and then low in FY22; FY23 saw some normalisation, explaining much of the profit reduction. Finance costs have also increased due to loan book growth and higher rates. Within the total pre-tax profits, Advantage contributed £37.2m (FY22: £43.7m – see comments on provisioning) while Aspen property bridging continued to make good progress at £4.5m (£3.4m). Given the volatility of impairments, FY23 EPS of 277.5p can sensibly be compared with the 239.4p earned in FY20 (+16%). With a final dividend of 60p, the full year dividend is 133p (126p).

Outlook and estimates

Looking ahead, S&U acknowledges continuing uncertainty over the economic background and the impact of inflation and higher interest rates. It has adjusted its lending criteria and raised pricing accordingly, has seen a strong start to trading in the current year and still sees good opportunities for more moderate lending growth in both its businesses against this background. Our earnings estimate for FY24 is marginally increased and we have introduced an FY25 estimate showing growth of 12%.

Valuation

The shares trade on prospective P/E multiples of 8.9x and 8.0x for this year and next while the yield is 5.5%. The return on equity implied at the current share price is 12.4%, below pre-pandemic levels and the 14%-plus we forecast.

Investment summary

S&U is an established specialist lender with businesses addressing the non-prime motor finance and the property bridging markets. Advantage motor finance has a record of strong, profitable growth; it was affected by the pandemic but has bounced back strongly. It has also continued to work on improvements to support longer-term growth. Aspen Bridging, a relatively new business, has gained experience and is scaling up and making a more significant contribution to the group while maintaining a conservative underwriting approach. Both businesses focus on sustaining high levels of individual customer service and refinement of underwriting processes as competitive differentiators. The Coombs family owns c 53% of the equity and management takes a long-term, sustainable approach to the development of the group. The shares are valued at 1.3x book, a level that would be consistent with a return on equity (ROE) of 12.4%; this is below the 14% or more we estimate for FY24 and FY25 and the pre-COVID-19 five-year historical average of over 16%.

A long history with substantial change and growth

S&U’s origins lie in a business founded by the chairman’s grandfather in 1938. That evolved into a home collected credit company and in 1999 a nonprime motor finance business was added with the foundation of Advantage Finance. 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 continued strong growth at Advantage and subsequently the formation of a new property bridging business (Aspen Bridging) in 2017.

Growth in non-prime motor finance since 1999

Advantage Finance is based in Grimsby with over 200 employees. Graham Wheeler took over as managing director in 2019, bringing extensive experience as a senior executive in the motor finance sector, while much of the management team has been with the company since launch. Advantage has a strong long-term growth record and, at £311m, net customer receivables have grown at a 10-year compound growth rate of 19%, even after a pandemic-affected period in FY21–22. The company has over 65,000 live customers and recorded 23,922 new transactions in FY23. Advantage focuses on the non-prime/near-prime area of the market, all loans are hire purchase loans and 90% of its lending is through over 40 brokers, with 5% each direct from dealerships and existing customers. The broker-sourced business is divided roughly 60/40 between internet and dealership brokers. S&U has relationships with the largest UK brokers including names such as CarFinance 247, Zuto, Evolution Funding, Jigsaw and Midland Credit. 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 8% of the staff) is an important enabler for the business as it helps maintain a high-speed response to loan applications (within 10 seconds for 95% of all applications) and rapid adjustments to systems to meet business requirements. An example of this was the introduction of a third credit rating agency (Equifax was added to Experian and TransUnion) including the merging of its data into the score card.

Most loans range from £5,000 to £9,000, with a maximum loan amount of £15,000; the average advance in FY23 was £7,799. The average original term was 54 months with a flat interest rate of 16.3% (on a typical loan of £7,800, c £14,000 is repayable including interest and fees). The provisional approval rate for the more than 2.5m loan applications in the last financial year was approximately 33% and the actual sign-up rate in FY23 was equivalent to about 3% of approvals or just below 1% of original applications. The small ratio of deals signed in part reflects buyers’ use of the internet to source finance before shopping for a car and is not overly onerous for Advantage given the automation of responses to applications. Advantage’s Dealflo esignature system helps to support the sign-up rate following approval, by guiding customers through terms and conditions and verifying their digital signatures.

Advantage had achieved 20 years of consecutive profit growth until FY21, reflecting growth in the loan book paired with successful credit control, underpinned by 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 net receivables, revenue and profit margin at Advantage since 2013. Growth accelerated in the post financial crisis period 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 as a result of rising broker commission and impairments, and, to a lesser extent, the withdrawal from the sale of gap insurance (2015). In FY21 the impact of the pandemic on transactions and revenues was magnified for profitability as increased provisioning almost halved the pre-tax margin. In FY22 a reduction in the provision charge to below normal levels together with strong collection performance lay behind the bounce in margin to 55%. In FY23 there was some normalisation in the level of impairment, although it remained relatively low, and the pre-tax margin was over 40%, comparable to FY19–20.

Exhibit 1: Motor receivables, revenue and pre-tax profit margin

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 and in February 2023 Ed Ahrens, who has led Aspen since its formation, was appointed as an executive director to the board of S&U, signifying the progress achieved by the business.

Loans are made for refurbishment, light development or investment in the residential, houses of multiple occupation, prime semi-commercial and prime commercial market segments. Residential is the largest category with 95% of collateral being housing. About a third of projects involve planned refurbishment during the loan term. The average original term is 11 months with an option for Aspen to extend the term where appropriate; repayment is financed by sale or re-mortgaging. Loans are all unregulated (not owner-occupier) and are secured with a first charge. The maximum loan size is £10m. 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 Aspen team. Since launch 517 secured property bridging loan facilities have been provided with an average gross value of c £700,000 and an average maximum gross loan to value of 72%. At end FY23 net receivables stood at £113.9m and during the year there were 148 transactions with a gross average loan size of £905,000.

Exhibit 2 shows the development of the loan book, revenue and pre-tax profit margin. The business moved into profit in FY19 and the loan book has been expanded in a controlled way as the Aspen team gained experience and broadened its network of relationships in the market. This was aided by involvement in provision of CBILS loans in FY22, which gave access to larger, higher-quality borrowers. The growing customer base provides a source of increasing repeat business in addition to introductions from broker relationships that have strengthened as Aspen has become more established.

As it has grown, Aspen has developed and added to its staff (now 21 compared with 18 a year ago) and occupies a larger office, ensuring it has the capacity to support further growth.

Exhibit 2: Aspen property bridging loan book, revenue and pre-tax profit margin

Source: S&U, Edison Investment Research. Note: FY22 excludes CBILS loans.

FY23 results analysis

Exhibit 3 provides a summary of the results for FY23 compared with the previous three years, including the pre-pandemic FY20 period. We highlight a number of points from this period, comparing the FY23 result with FY22 unless stated.

Looking at the level of customer receivables, the number of new motor loans was up by over 20% and was just above the FY20 level. This growth with still-strong collections left motor finance receivables up 18%. Property bridging continued its development with receivables up 78% in the year. Contributing to its growth was a move towards larger, higher-quality loans to experienced borrowers and the launch of a new bridge-to-let product, which accounted for nearly £23m of the £134m of advances made during FY23. Taking the two businesses together, the average level of customer receivables increased by 22% and, reflecting the mix of revenue margins (32% at Advantage and 14% Aspen), group revenue increased by nearly 17%.

A major feature of the profit and loss account over the FY20–23 period is the fluctuation in motor finance impairments driven by the pandemic and prudent forward-looking provisioning under IFRS 9. As noted earlier, the sharp rise in FY21 impairments was followed by a very low loan loss charge in FY22. In FY23 there was a degree of normalisation in the impairment charge although this was still relatively low in historical terms at 14% of revenue (in the five years to FY20 the average charge was 20%). In absolute terms, this was the largest single contributor to the £1.9m or 4% reduction in operating profit, with other notable factors including the transaction-related increase in cost of sales and a partially inflation-related increase in administrative costs.

Exhibit 3: P&L analysis

£000 unless shown

FY20

FY21

FY22

FY23

y-o-y % change

Number of new motor loans

23,334

15,589

19,747

23,922

21.1

Motor finance receivables at period end

280,757

246,766

259,036

306,817

18.4

Bridging receivables at period end

20,993

34,144

63,879

113,893

78.3

Revenue

Motor finance

85,465

79,553

78,898

89,801

13.8

Property bridging

4,474

4,208

8,991

12,913

43.6

Total

89,939

83,761

87,889

102,714

16.9

Impairments

Motor finance

(16,507)

(35,995)

(3,805)

(12,885)

238.6

Property bridging

(713)

(710)

(315)

(992)

214.9

Total

(17,220)

(36,705)

(4,120)

(13,877)

236.8

Other cost of sales

(19,872)

(14,264)

(18,771)

(23,676)

26.1

Administration expenses

(12,413)

(10,576)

(13,679)

(15,731)

15.0

EBITDA

40,434

22,216

51,319

49,430

-3.7

Depreciation

(450)

(520)

(529)

(525)

-0.8

Operating profit / loss

39,984

21,696

50,790

48,905

-3.7

Finance expense

(4,850)

(3,568)

(3,772)

(7,495)

98.7

Pre-tax profit

35,134

18,128

47,018

41,410

-11.9

Tax

(6,252)

(3,482)

(9,036)

(7,692)

-14.9

Net profit

28,882

14,646

37,982

33,718

-11.2

EPS fully diluted (p)

239.4

120.7

312.7

277.5

-11.3

Dividend per share (p)

120.0

90.0

126.0

133.0

5.6

Source: S&U, Edison Investment Research

Finance expense nearly doubled as average debt increased by 40% and the cost of debt rose from 3.4% to 4.8%.

This left pre-tax profit and fully diluted EPS down 12% and 11%, respectively, at £41.4m and 277.5p. Given the pandemic-driven volatility in impairments highlighted above, it is perhaps more useful to compare FY23 pre-tax profit with the FY20 level (against which it increased by 18%) or the average for FY21–22 (+27%).

The group has proposed a final dividend of 60p giving a full year total of 133p (+6%), in line with the group’s aim to pay twice-covered dividends.

Exhibit 4: Motor finance receivables payments analysis

% unless shown

FY20

FY21

FY22

FY23

Up to date

77.9

60.8

71.5

75.1

Monthly payments past due - up to:

1

9.0

4.5

5.9

8.5

2

3.9

3.3

2.9

4.0

3

2.4

7.8

4.4

2.9

4

1.5

5.1

2.5

1.8

5

0.9

3.5

1.7

1.2

6

0.6

2.9

1.9

1.0

Over 6

2.0

10.1

7.5

3.9

Legal and debt recovery

1.8

1.9

1.6

1.5

Total net receivables

100.0

100.0

100.0

100.0

Total net receivables (£m)

280.8

246.7

259.0

306.8

Source: S&U, Edison Investment Research. Note: Payment holidays here are shown as arrears.

Exhibit 4 shows how the pandemic affected the payment profile in Advantage motor finance and the further improvement seen in FY23. Here accounts on payment holiday are included as in arrears to illustrate the effect on cash payments (in the accounts, in line with Bank of England guidance, they were not counted as part of Stage 3 or credit impaired provisioning). The proportion of net receivables where payments are up to date increased to 75.1% in FY23 compared with a low point of 60.8% in FY21. The profile is now more comparable to the pre-pandemic figures shown for FY20.

Background

In this section we update the charts we use to provide background indicators for Advantage and Aspen.

From February 2022 the Treasury-collected compilation of GDP forecasts for 2023 followed a downward trend until December (Exhibit 5), but the readings in the last four months have been essentially stable, with the latest average of forecasts being for a modest GDP reduction of 0.6% (Exhibit 6). Average annual inflation (CPI) expectations for 2023 peaked at 5.0% but have since moderated to 3.9% with 2.4% estimated for 2024. The forecast for annual average unemployment has risen modestly to 4.4% over the period shown in Exhibit 5. Medium-term forecasts (not shown) collected in February this year include 2025 and 2026 GDP growth of 1.8%, unemployment of 4.5% and inflation of c 2%, suggesting a relatively benign, if low-growth, background.

Exhibit 5: Evolution of UK economic forecasts for 2023

Exhibit 6: Independent forecasts for 2023 and 2024

%

Average

GDP growth

 

2023

-0.6

2024

0.8

Labour Force Survey unemployment rate Q4

2023

4.4

2024

4.5

Inflation Q4 (CPI)

 

2023

3.9

2024

2.4

%

GDP growth

2023

2024

Labour Force Survey unemployment rate Q4

2023

2024

Inflation Q4 (CPI)

2023

2024

Average

 

-0.6

0.8

4.4

4.5

 

3.9

2.4

Source: Collected by HM Treasury (last reading March 2023)

Source: Collected by HM Treasury (March 2023)

Exhibit 5: Evolution of UK economic forecasts for 2023

Source: Collected by HM Treasury (last reading March 2023)

Exhibit 6: Independent forecasts for 2023 and 2024

%

Average

GDP growth

 

2023

-0.6

2024

0.8

Labour Force Survey unemployment rate Q4

2023

4.4

2024

4.5

Inflation Q4 (CPI)

 

2023

3.9

2024

2.4

%

GDP growth

2023

2024

Labour Force Survey unemployment rate Q4

2023

2024

Inflation Q4 (CPI)

2023

2024

Average

 

-0.6

0.8

4.4

4.5

 

3.9

2.4

Source: Collected by HM Treasury (March 2023)

Exhibit 7 shows how consumer confidence has fluctuated since 2019. Confidence recovered strongly following the onset of the COVID-19 pandemic, before falling sharply again through a combination of the arrival of the Omicron wave, growing concern over the cost of living and the war in Ukraine. Confidence was sapped further in the second half of 2022 as inflation hit harder and interest rates rose. The most recent reading, for March, has shown a continuation of the somewhat surprising uptrend since January with most index components increasing, although consumers’ confidence about their personal financial position has weakened. The absolute level of the overall index remains low in historical terms and pressures on consumers, including Advantage customers, remain elevated. S&U has previously noted in mitigation that wages are likely to adjust and that its customers tend to depend on their vehicles for transport to work. Advantage continues to make allowance for the rise in inflation within its affordability calculations and to fine-tune its credit criteria.

In Exhibit 8 we can see that, after an increase in 2020, the unemployment rate moved below prior levels and has been broadly stable since the middle of 2022. The level of redundancies, a more immediate measure, saw a very sharp spike as the pandemic took hold, but then fell rapidly before picking up again in the second half of 2022. Even so the rate of redundancies is still only just approaching pre-pandemic levels.

Exhibit 7: GfK UK consumer confidence indicator

Exhibit 8: UK redundancies and unemployment

Source: Refinitiv (last value March 2023)

Source: ONS (last value January 2023)

Exhibit 7: GfK UK consumer confidence indicator

Source: Refinitiv (last value March 2023)

Exhibit 8: UK redundancies and unemployment

Source: ONS (last value January 2023)

Next, we look at data on used car transactions and used car finance. Exhibit 9 compares the monthly sales pattern in the three years from 2020–22. This highlights the sharp drop in used car transactions in April 2020, but volume recovered very well following the initial lockdown. From April 2021, activity did begin to approach pre-pandemic levels although supply limitations resulting from constraints on new car production tempered volumes and, in 2022, the number of transactions was 13% below the 2019 level. Exhibit 10 shows a similar pattern in used car finance, with seasonal dips evident in addition to lockdown impacts. There were year-on-year increases in the value of loans in each month in 2022 until November, which saw a 6% decline with 4% reductions also seen in December and January. In March the Finance and Leasing Association said that its research indicated that the value of new loans to consumers for used car purchases in 2023 may fall by 12%, a more cautious outlook than Advantage sees for its own business currently (see below).

Exhibit 9: Monthly used car transactions 2020–22

Exhibit 10: Used car finance through dealerships

Source: SMMT (last value December 2022)

Source: Finance and Leasing Association (last value January 2023)

Exhibit 9: Monthly used car transactions 2020–22

Source: SMMT (last value December 2022)

Exhibit 10: Used car finance through dealerships

Source: Finance and Leasing Association (last value January 2023)

Used car prices (see Exhibit 11) experienced a very sharp increase from mid-2021, with strong consumer demand and reduced supply pushing prices up. From February 2022, the index showed small month-on-month decreases (see Exhibit 12), suggesting a slight softening of demand and/or easing of supply constraints. However, prices have shown limited change since then and remain at a historically high level. At the margin, a fall in auction prices, prompted by reduced demand or greater supply, would be a negative for Advantage, but its exposure here through repossessed car sales is moderated by the relatively low value of the vehicles it finances. In its calculations for impairment provisioning for FY23, the group assumed that used car prices would fall by 13.5%; changing the assumption to 8.5% or 18.5% would decrease provisions by £2.8m or increase them by £2.7m respectively (see preliminary release for further detail).

In its comments on the outlook for the business, Advantage indicated that demand was still strong at the start of the year and it looks for growth in receivables in FY24, albeit at a lower rate than FY23 given the cost of living pressure on consumers. It characterises the year as one of consolidation and regulation as the FCA’s new Consumer Duty is implemented (end July for new and existing products). Advantage believes the regulation will play to its strengths given its traditional emphasis on treating customers fairly. It liaises closely with the FCA and is well on track to complete the tasks it identified as necessary to ensure compliance. The areas it is addressing include enhancing customer communications, generating further evidence of good customer outcomes and oversight of broker partners and their customer service protocols. During the year Advantage will launch its new branding, which will seek to highlight its philosophy of finance with a human face, encapsulated in the headline ‘We see more than your score’.

Exhibit 11: Second-hand car price index

Exhibit 12: Monthly change in second-hand car prices

Source: ONS CPI Index (last value February 2023)

Source: ONS CPI Index. Note: Month-on-month % change.

Exhibit 11: Second-hand car price index

Source: ONS CPI Index (last value February 2023)

Exhibit 12: Monthly change in second-hand car prices

Source: ONS CPI Index. Note: Month-on-month % change.

Turning to the background for Aspen Bridging, Exhibit 13 shows the number of UK non-residential and residential transactions, with residential being most relevant for Aspen. Both saw sustained improvement following the initial lockdown in 2020, with residential data fluctuating sharply as buyers sought to take advantage of the temporary increase in the stamp duty land tax nil-rate band. This is also evident in the number of mortgage approvals (Exhibit 14). The transaction data does not yet capture a marked slowdown, but mortgage approvals have slowed sharply.

Exhibit 13: UK property transactions

Exhibit 14: Monthly number of mortgage approvals

Source: HM Revenue & Customs. Note: Seasonally adjusted, to February 2023.

Source: Bank of England. Note: Seasonally adjusted, to February 2023.

Exhibit 13: UK property transactions

Source: HM Revenue & Customs. Note: Seasonally adjusted, to February 2023.

Exhibit 14: Monthly number of mortgage approvals

Source: Bank of England. Note: Seasonally adjusted, to February 2023.

Aspen itself notes that higher interest rates may mean that more restricted transaction activity will continue during 2023 and that expectations are for average house prices to fall by 5% (some estimates are for a larger fall). This could make it more difficult for borrowers to complete their projects in the expected timescale. In response Aspen has already increased its own rates to maintain margin and tightened both valuations and loan to value criteria. It has also moved towards higher-quality and less mortgage dependent borrowers and higher-value properties, which it expects will provide some insulation from wider market fluctuations. On a longer view, S&U continues to see an imbalance between supply and demand for good-quality homes as a favourable backdrop for its customers who are refurbishing and developing properties. As a small business, Aspen offers a bespoke service and has significant scope for measured expansion now that it is more established in the market.

Financials

Changes in key numbers from our estimates are shown in Exhibit 15 and further details are included in Exhibit 16. The table also includes actual versus estimated numbers for FY23. Changes in our overall FY24 estimates are modest and we have included FY25 estimates for the first time. The increase in corporation tax rate this year explains the small reduction in earnings per share for FY24; the effective tax rate increases from 18.6% for FY23 to our assumptions of 24% and 25% for FY24 and FY25 respectively.

Exhibit 15: 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 (%)

FY23

102.6

102.7

0.1%

41.2

41.4

0.5%

276.2

277.5

0.5%

132.0

133.0

0.8%

FY24e

121.0

119.3

-1.4%

42.5

42.9

1.0%

265.6

268.4

1.1%

133.0

133.0

0.0%

FY25e

N/A

131.9

N/A

48.7

N/A

300.3

N/A

150.0

Source: Edison Investment Research. Note: For FY23 old figures are our pre-results estimates and new are actual.

The next table gives details of our other estimate assumptions. In the motor business we have allowed for receivables growth of nearly 9% and 7% for FY24 and FY25, respectively, and assume that impairments normalise further to 17.3% and 17.7% of sales, somewhat lower than pre-pandemic levels, reflecting the benefit of changes in the customer mix. The risk-adjusted yield (revenue less impairments as a percentage of average receivables) for the two years is c 26% (FY23: 27.3%, and FY18–20 average: 25.4%). Bridging receivables are assumed to reach £130m in the current year followed by £150m, a slower pace of growth than in prior years given the market background but still set to make a more significant contribution to group profitability.

Exhibit 16: Estimate summary

£000 unless stated

FY23

FY24e

FY25e

% change FY24

% change FY25

Number of new motor loans

23,922

24,200

25,000

1.2

3.3

Motor finance receivables at period end

306,817

333,348

356,377

8.6

6.9

Bridging loans at period end

113,893

130,000

150,000

14.1

15.4

Total customer receivables

420,710

463,348

506,377

10.1

9.3

Revenue

Motor finance

89,801

100,418

108,811

11.8

8.4

Property bridging

12,913

18,926

23,100

46.6

22.1

Total

102,714

119,344

131,911

16.2

10.5

Impairments

Motor finance

(12,885)

(17,327)

(19,260)

34.5

11.2

Property bridging

(992)

(1,514)

(1,848)

52.6

22.1

Total

(13,877)

(18,841)

(21,108)

35.8

12.0

Other cost of sales

(23,676)

(24,956)

(26,456)

5.4

6.0

Administration expenses

(15,731)

(16,708)

(18,468)

6.2

10.5

EBITDA

49,430

58,839

65,880

19.0

12.0

Depreciation

(525)

(551)

(652)

5.0

18.2

Operating profit / loss

48,905

58,288

65,229

19.2

11.9

Finance expense

(7,495)

(15,354)

(16,573)

104.9

7.9

Pre-tax profit

41,410

42,934

48,656

3.7

13.3

Tax

(7,692)

(10,327)

(12,164)

34.3

17.8

Net profit

33,718

32,607

36,492

-3.3

11.9

EPS fully diluted (p)

277.5

268.4

300.3

-3.3

11.9

Dividend per share (p)

133.0

133.0

150.0

0.0

12.8

Source: Edison Investment Research

Revenues for both businesses are expected to benefit from increases in rates implemented at end FY23 and early FY24, although we assume the revenue yield at Advantage will be stabilised by mix change to lower-risk categories. We have also factored in the cost of higher interest rates, which is a key driver of the doubling in the estimated financing cost in FY24.

The segmental cash flow analysis shows how cash flow at Advantage between FY21 and FY23 has changed as contraction was followed by resumed growth. The pattern was as expected, with collections outpacing advances in the pandemic period followed by higher advances and a £32m outflow in FY23, mirroring the inflow in FY21.

Exhibit 17: Segmental cash flow analysis

£m

FY21

FY22

FY23

Comments

Motor Finance

Advances

(102.6)

(140.9)

(186.6)

High level of transactions and higher average loan value

Monthly collections

138.5

152.7

161.8

Strong collections

Settlements/reloans

28.0

34.1

35.8

Debt recovery

13.8

17.1

18.1

Overheads/interest

(27.2)

(30.6)

(39.1)

Higher interest rates plus employee/other costs

Corporation tax

(6.2)

(8.3)

(7.1)

Dividend

(12.7)

(10.0)

(15.0)

Motor Finance (outflow)/inflow

31.6

14.1

(32.1)

Evidence of stronger growth

Property bridging

Gross advances

(43.5)

(111.6)

(133.9)

FY22 includes CBILS lending

Retention collections

5.2

13.3

14.8

Collections

15.2

65.7

62.5

FY22 boosted by early CBILS repayments

Debt recovery

13.6

11.4

18.9

Successful recoveries

Overheads/interest

(2.8)

(5.3)

(7.5)

Corporation tax

(0.2)

(0.4)

(0.8)

Dividend

(1.2)

Property bridging (outflow)/inflow

(12.5)

(26.9)

(47.2)

Further investment in the growth of the business

Other (outflow)/inflow

(0.1)

(2.0)

0.5

Group (outflow)/inflow

19.0

(14.8)

(78.8)

Opening net debt

117.8

98.8

113.6

Closing net debt

98.8

113.6

192.4

Source: S&U, Edison Investment Research. Note: Net debt is shown excluding lease liability.

Aspen property bridging expanded further in FY23 with higher advances driving the increased outflow of £47m. At the group level this left an outflow of £79m compared with the inflow of £19m in FY21 and outflow of £15m in FY23.

Net debt increased to £193m (including lease liability; £192m excluding this). Committed debt facilities available total £210m and the group will look to add further capacity in the current year. The net debt/equity ratio of 86% is well below the covenanted limit of 120%. On our estimates, net debt could rise to c £240m by end FY25 with net debt/equity at 93%.

Valuation

We continue to frame valuation using our ROE/COE calculations. If we assume a cost of equity (COE) of 10% and long-term growth of 2%, then the share price at the time of writing (2,400p) would be consistent with an ROE of 12.4%, which is below our estimates for FY24 (14.0%) and FY25 (14.5%). Historically, S&U has achieved higher returns on equity (the five-year average for the period FY16–20 is 16.3%). As noted on the first page, the prospective earnings multiple is below 9x and the yield above 5%.


Exhibit 18: Financial summary

£'000s

2019

2020

2021

2022

2023

2024e

2025e

Year end 31 January

PROFIT & LOSS

Revenue

 

 

82,970

89,939

83,761

87,889

102,714

119,344

131,911

Impairments

(16,941)

(17,220)

(36,705)

(4,120)

(13,877)

(18,841)

(21,108)

Other cost of sales

(15,751)

(19,872)

(14,264)

(18,771)

(23,676)

(24,956)

(26,456)

Administration expenses

(10,763)

(12,413)

(10,576)

(13,679)

(15,731)

(16,708)

(18,468)

EBITDA

 

 

39,515

40,434

22,216

51,319

49,430

58,839

65,880

Depreciation

 

 

(414)

(450)

(520)

(529)

(525)

(551)

(652)

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

 

 

39,101

39,984

21,696

50,790

48,905

58,288

65,229

Exceptionals

0

0

0

0

0

0

0

Non-recurring items

0

0

0

0

0

0

0

Investment revenues / finance expense

(4,541)

(4,850)

(3,568)

(3,772)

(7,495)

(15,354)

(16,573)

Profit before tax

 

 

34,560

35,134

18,128

47,018

41,410

42,934

48,656

Tax

(6,571)

(6,252)

(3,482)

(9,036)

(7,692)

(10,327)

(12,164)

Profit after tax

 

 

27,989

28,882

14,646

37,982

33,718

32,607

36,492

Average Number of Shares Outstanding (m)

12.1

12.1

12.1

12.1

12.1

12.2

12.2

Diluted EPS (p)

 

 

232.0

239.4

120.7

312.7

277.5

268.4

300.3

EPS - basic (p)

 

 

233.2

239.6

120.7

312.8

277.5

268.4

300.3

Dividend per share (p)

118.0

120.0

90.0

126.0

133.0

133.0

150.0

EBITDA margin (%)

47.6%

45.0%

26.5%

58.4%

48.1%

49.3%

49.9%

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

47.1%

44.5%

25.9%

57.8%

47.6%

48.8%

49.4%

Return on equity (%)

17.6%

16.8%

8.1%

19.6%

15.6%

14.0%

14.5%

BALANCE SHEET

Non-current assets

 

 

185,383

197,806

173,413

184,189

222,031

244,786

267,645

Current assets

 

 

95,430

108,275

111,426

143,040

206,143

225,550

245,941

Total assets

 

 

280,813

306,081

284,839

327,229

428,174

470,336

513,586

Current liabilities

 

 

(6,722)

(7,424)

(5,309)

(8,789)

(6,918)

(7,605)

(8,118)

Non current liabilities inc pref

(108,724)

(119,183)

(98,501)

(111,693)

(196,371)

(221,399)

(243,927)

Net assets

 

 

165,367

179,474

181,029

206,747

224,885

241,331

261,541

NAV per share (p)

1,375

1,493

1,490

1,702

1,852

1,987

2,153

CASH FLOW

Operating cash flow

 

 

10,530

4,946

32,940

(2,094)

(62,760)

(9,031)

(5,552)

Net cash from investing activities

(785)

(265)

(1,112)

(284)

(660)

(1,080)

(1,080)

Dividends paid

(13,080)

(14,461)

(13,098)

(12,263)

(15,546)

(16,161)

(16,282)

Other financing (excluding change in borrowing)

14

14

2

1

1

0

0

Net cash flow

 

 

(3,321)

(9,766)

18,732

(14,640)

(78,965)

(26,272)

(22,914)

Opening net (debt)/cash

 

 

(104,990)

(108,311)

(118,077)

(99,345)

(113,985)

(192,950)

(219,222)

Closing net (debt)/cash

 

 

(108,311)

(118,077)

(99,345)

(113,985)

(192,950)

(219,222)

(242,136)

Source: S&U accounts, Edison Investment Research. Note: EPS on a reported basis.

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 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

CEO, Advantage Finance: Graham Wheeler

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.

Graham Wheeler has over 40 years’ experience in motor finance across consumer and business lending, much of it in senior leadership roles. He developed through blue-chip companies like GM, Barclays, GE Capital and Volkswagen FS, where he held the post of UK CEO for 11 years. Graham joined the S&U board in September 2020 after a year leading its subsidiary Advantage Finance.

CEO, Aspen Bridging: Ed Ahrens

Director: Jack Coombs

Ed Ahrens joined S&U in 2014, becoming group strategic development director before leading the development of Aspen Bridging. He has been in banking and specialty finance for over 30 years with his experience including senior roles at Barclays, AIB and as a founding director at Vanquis Bank.

Jack Coombs was co-founder of Aspen Bridging having joined S&U as group development executive. He previously worked in PwC’s valuation team and qualified there as a chartered accountant.

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 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.

CEO, Advantage Finance: Graham Wheeler

Graham Wheeler has over 40 years’ experience in motor finance across consumer and business lending, much of it in senior leadership roles. He developed through blue-chip companies like GM, Barclays, GE Capital and Volkswagen FS, where he held the post of UK CEO for 11 years. Graham joined the S&U board in September 2020 after a year leading its subsidiary Advantage Finance.

Principal shareholders

(%)

Principal shareholders

(%)

Wiseheights

19.93

JEC Coombs

13.80

GDC Coombs

13.47

AMV Coombs

10.51

JS Coombs

3.80

M Cole-Fontayne

3.29

Grevayne (controlled by A Coombs and G Coombs)

2.70

AC Coombs

2.47

Renta 4

2.39

F Coombs

2.33

S Coombs

2.33

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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 2023 Edison Investment Research Limited (Edison).

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London, WC1R 4PS

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United Kingdom

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 £60,000 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 2023 Edison Investment Research Limited (Edison).

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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