S&U — Covid-19 impacts but ready to resume progress

S&U (LSE: SUS)

Last close As at 12/07/2024

GBP19.40

30.00 (1.57%)

Market capitalisation

GBP236m

More on this equity

Research: Financials

S&U — Covid-19 impacts but ready to resume progress

In its trading update S&U confirmed the impact of COVID-19, particularly on its main Advantage motor finance business. With new transactions and collections running below normal levels and additional provisions currently being made, the group expects a significant impact on results this year. Aspen property bridging has been affected by lower activity but has seen more positive indicators recently. The group is taking a prudent approach to new lending, but cash generation has left good headroom to respond once conditions begin to improve.

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Financials

S&U

COVID-19 impacts but ready to resume progress

Q121 trading update

Financial services

11 June 2020

Price

1,660p

Market cap

£201m

Group debt (£m) at 8 June 2020

98

Shares in issue

12.1m

Free float

26%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.6)

(21.2)

(31.4)

Rel (local)

(7.1)

(24.9)

(21.0)

52-week high/low

2,500p

1,430p

Business description

S&U’s Advantage motor finance business lends on a simple hire-purchase basis to lower- and middle-income groups who may have impaired credit records which restrict their access to mainstream products. It has over 64,000 customers. The Aspen property bridging business has been developing, following its launch in early 2017.

Next events

Q2 and H121 trading update

11 August 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

In its trading update S&U confirmed the impact of COVID-19, particularly on its main Advantage motor finance business. With new transactions and collections running below normal levels and additional provisions currently being made, the group expects a significant impact on results this year. Aspen property bridging has been affected by lower activity but has seen more positive indicators recently. The group is taking a prudent approach to new lending, but cash generation has left good headroom to respond once conditions begin to improve.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/17

60.5

25.2

169.1

91.0

9.8

5.5

01/18

79.8

30.2

202.4

105.0

8.2

6.3

01/19

83.0

34.6

232.0

118.0

7.2

7.1

01/20

89.9

35.1

239.4

120.0

6.9

7.2

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

New lending and collections fell with lockdown

At the time of the FY20 results (in April) new motor finance transactions were at 15% of the prior year level reflecting the impact of the lockdown. S&U reports a steady improvement since then with transactions at 40% of normal and further improvement likely now that car sales outlets are open. Collections have been hit by customer confidence and the FCA’s measures offering borrowers a potential three-month payment freeze (unnecessary in S&U’s view given adherence to Treating Customers Fairly principles). This has meant a 20% reduction in collections. However, new payment holiday applications have dwindled stabilising the level of collections. For Aspen, the property bridging business, activity has been understandably subdued and transactions are running below budget. Nevertheless, regular collections have been ahead of budget while the tail of late/defaulted cases has been reduced.

Outlook

The uncertainty over the outlook has not abated. For Advantage the real impact of the economic downturn on its customer base and hence on its cash flows will only become evident as furlough measures end, lockdown easing takes place and the shape of the new normal emerges. On this basis S&U continues to refrain from providing specific guidance although noting that impairment provisions will have a significant impact on Advantage’s results this year. Nevertheless, both Advantage and Aspen are positioning themselves to recover strongly once conditions are appropriate.

Valuation

S&U trades on a historical P/E in line with the average for its peers while an ROE/COE model suggests the market is assuming a sustainable return on equity of below 11%, compared with a five-year average of over 16%. A conservative view is understandable in the current circumstances but could change significantly as the outlook becomes clearer.

Background and outlook

In this section we include updated indicators to provide some background in assessing the outlook for S&U, focusing mainly on the motor finance business. In Exhibit 1 we can see that the latest reading for consumer confidence (May) shows a further small deterioration following the initial sharp decline in April. As before, the level of unemployment and redundancies (for March), shown in Exhibit 2, have still to reflect the impact on the economy of the lockdown although redundancies had already started to tick up and, anecdotally, the recent news flow relating to significant job losses has increased. The spike in redundancies in 2008/09 arising from the financial crisis is an indicator of the substantial impact that is likely to become evident in due course, partially softened by government support for companies and subject to the pace of economic revival as lockdown is eased.

Exhibit 1: GFK UK consumer confidence indicator

Exhibit 2: UK redundancies and unemployment

Source: Bloomberg (last value May 2020)

Source: Bloomberg (last value March 2020)

Exhibit 1: GFK UK consumer confidence indicator

Source: Bloomberg (last value May 2020)

Exhibit 2: UK redundancies and unemployment

Source: Bloomberg (last value March 2020)

Unsurprisingly economic forecasts are changing rapidly reflecting emerging economic and health data. The table below includes both the illustrative coronavirus reference scenario prepared by the UK Office for Budget Responsibility (OBR) in April and more recent independent forecasts. The OBR scenario illustrates potential effects assuming a three-month lockdown followed by a further three months when restrictions are partially lifted. Among the OBR’s observations is that in the scenario GDP falls by 35% in the second quarter, and that unemployment rises by more than two million to 10% (higher than in the financial crisis, as shown above). In its scenario GDP would bounce back quickly but unemployment would subside more slowly. When comparing the average output of the recent independent forecasts with the OBR scenario there are two key features: (1) both GDP and average earnings are expected to fare better in 2020 but the recovery in 2021 is much less pronounced; and (2) unemployment is expected to remain higher for longer in the independent forecasts. The net effect of these differences would be a worse medium-term outcome on each measure on the recent independent forecasts.

Exhibit 3: OBR coronavirus scenario and Treasury-collected independent forecasts

y-o-y % change

2019

2020

2021

2022

2023

2024

OBR illustrative scenario

GDP

1.4

-12.8

17.9

1.5

1.3

1.4

Average earnings

2.8

-7.3

18.3

1.6

2.5

3.1

Unemployment rate (per cent)

3.8

7.3

6.0

4.5

4.0

4.1

New independent forecasts (May 2020)

GDP

-8.3

5.8

2.7

2.1

1.8

Average earnings

0.8

2.4

2.9

3.2

3.1

Unemployment rate (per cent)

7.0

6.8

6.1

5.5

5.0

Source: Office for Budget Responsibility, HM Treasury comparison of independent forecasts

The next chart (Exhibit 4) illustrates the dramatic impact of the lockdown on used car transactions and private new car registrations (last data March and May, respectively). As would be expected, used car finance through dealerships (Exhibit 5, latest data for April) followed a similar pattern with a near halt in transactions as dealerships were closed. As mentioned earlier, Advantage transactions have recovered from the initial hiatus as the lockdown took effect and are now running at 40% of normal levels. Further recovery is expected following the opening of car retailers and with the constraints on public transport due to social distancing, the importance of a car for transport to work for many will be underlined.

Exhibit 4: Used car transactions and new registrations

Exhibit 5: Used car finance through dealerships

Source: SMMT, Edison Investment Research

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

Exhibit 4: Used car transactions and new registrations

Source: SMMT, Edison Investment Research

Exhibit 5: Used car finance through dealerships

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

Looking ahead, it is worth repeating some of the points made at the time of the FY20 results regarding Advantage’s preparations to respond strongly when conditions normalise. Actions include development of a customer care centre to improve engagement, a refreshed Advantage brand, website development to facilitate customer self-service, new technology for customer underwriting and onboarding, development of a live scoreboard for existing customers to enhance collections and structuring collection teams to improve care of higher-risk accounts. Beyond this there may be opportunities to develop partnerships with prime and near-prime lenders to source business, to tap into the opportunities presented by open banking, to increase the level of customer renewals and to consider developing direct to customer business.

To provide a longer-term context, Exhibit 6 shows the history of Advantage’s net receivables and revenue less the annual impairment charge as a percentage of average net receivables (risk-adjusted yield). The risk-adjusted yield aids comparison following the change in accounting for revenue in FY20.1 Evident here is the substantial increase in the level of receivables over the period and, in the period to FY15, the rise in risk-adjusted yield following the financial crisis when capital constraints and retrenchment in the banking sector reduced the availability of credit in the non-prime segment. During this time Advantage has continuously refined its underwriting system and invested in IT development. The business has therefore developed significantly since the financial crisis while the nature of the current crisis is also markedly different meaning there are probably few direct parallels.

  In FY20 and FY19 Advantage Finance revenue relating to lease agreements classified as credit impaired is included net of the impairment provision, removing the grossing up of revenue and impairments that was seen previously. FY19 results were restated removing £6.3m from both revenue and impairments. There was no impact on pre-tax profit, earnings or the balance sheet.

Exhibit 6: Advantage receivables and risk-adjusted yield on average receivables

Source: S&U, Edison Investment Research

Accounting standards have also evolved since the earlier crisis with the introduction IFRS 9, which is designed to ensure an earlier recognition of credit losses on loans and receivables and requires provision for the expected lifetime loss for loans in stages 2 and 3 (see an explanation of S&U’s application of accounting standards in relation to impairment and measurement of receivables on page 61 of the FY20 annual report). The potential for reclassification of loans, requirement for estimates of lifetime losses in stages 2 and 3 and need to allow for macroeconomic factors when assessing expected 12-month losses on stage 1 loans all suggest a greater magnitude of impairment charge as a downturn takes place than might have been seen under previous accounting standards. Having said this with regard to reported figures, it is important to recall that S&U manages its business with an emphasis on understanding customer behaviour and the resulting cash flows, neither of which are affected by changes in accounting approach.

For Aspen property bridging, the reduced level of activity in the property market (Exhibit 7) is a prominent factor but there are some positive indicators following the reopening of the market. S&U references increases in Rightmove enquiry levels and has seen robust applications that have allowed it to develop a good quality pipeline. Transaction levels at Aspen in Q121 have been below a quarter of the full year budget and a cautious approach is being taken to new lending, but given the recent trends and the small scale of the business there should be scope to develop the loan book subject to opportunities with an appropriate risk/reward balance remaining available. The long-term aim remains for Aspen to grow to a scale where it can make a material positive contribution to the group.

Exhibit 7: UK property transactions (seasonally adjusted)

Source: Bloomberg

On the group’s treasury position, the reduced level of new transactions at Advantage has resulted in positive recent cash flows and group debt is reported as £98m (8 June), £30m below budget and compared with £118.5m at end February. Gearing is approximately 55%. The group has repaid a £25m tranche of debt early leaving loan facilities maturing at end April 2022 (£25m), March 2023 (£60m), March 2024 (£25m) and March 2025 (£20m). With these facilities the group retains headroom of over £30m.

Valuation

Given continuing heightened uncertainty and in the absence of guidance from S&U we have not included forecasts in this report. The updated version of our peer comparison table shown below therefore only shows calendar 2019 P/E ratios. The table includes companies with an exposure to motor finance and non-standard lending. S&U trades on a historical P/E in line with the peer average, while the yield is above average. Its historical return on equity (ROE) and price to book (P/BV) multiples are above the peer average, while an ROE/COE model (with assumed growth of 3% and cost of equity of 10%) would only require an assumed return on equity of c 10.8% to match the share price at the time of writing (1,660p) given the company’s book value. Increased confidence in the outlook could generate a significant revaluation (as for others in the comparison).

Exhibit 8: Peer comparison

Price
(p)

Market cap
(£m)

P/E 2019
(x)

Yield
(%)

ROE
(%)

P/BV
(x)

S&U

1,660

201

7.0

7.2

16.8

1.1

Close Brothers

1,155

1,747

13.1

5.7

14.9

1.2

PCF Group

22

54

6.0

1.9

12.6

0.9

Provident Financial

213

540

4.6

4.2

18.2

0.7

Secure Trust Bank

822

153

4.7

2.4

13.5

0.6

Peer average

7.1

3.6

14.8

0.9

Source: Refinitiv, Edison Investment Research. Note: P/Es adjusted to calendar year 2019. Priced 10 June 2020.

Exhibit 9 shows the recent share price performance for the peer group. The economic sensitivity of most lenders explains the significant negative share price moves of most of the stocks over most of the periods shown. Compared with the average, S&U’s share price has shown less weakness over all periods except the past month.

Exhibit 9: Peer group share price performance

% change

1 month

3 months

1 year

YTD

From 12m high

S&U

0.9

-20.7

-29.1

-21.1

-33.4

Close Brothers

6.5

1.5

-18.5

-27.7

-30.5

PCF Group

-10.4

-25.2

-35.8

-38.6

-44.7

Provident Financial

24.5

-39.7

-58.5

-53.4

-59.9

Secure Trust Bank

1.5

-38.2

-45.2

-48.6

-52.5

Average

5.5

-25.4

-39.5

-42.1

-46.9

Source: Refinitiv, Edison Investment Research

Exhibit 10: Financial summary

£’000s

2016

2017

2018

2019

2020

Year end 31 January

PROFIT & LOSS

Revenue

 

 

45,182

60,521

79,781

82,970

89,939

Impairments

(7,611)

(12,194)

(19,596)

(16,941)

(17,220)

Other cost of sales

(8,980)

(12,871)

(17,284)

(15,751)

(19,872)

Administration expenses

(7,131)

(8,332)

(9,629)

(10,763)

(12,413)

EBITDA

 

 

21,460

27,124

33,272

39,515

40,434

Depreciation

 

 

(209)

(253)

(294)

(414)

(450)

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

 

 

21,251

26,871

32,978

39,101

39,984

Exceptionals

0

0

0

0

0

Non-recurring items

0

0

0

0

0

Investment revenues/finance expense

(1,782)

(1,668)

(2,818)

(4,541)

(4,850)

Profit before tax (FRS 3)

 

 

19,469

25,203

30,160

34,560

35,134

Profit before tax (norm)

 

 

19,469

25,203

30,160

34,560

35,134

Tax

(3,583)

(4,861)

(5,746)

(6,571)

(6,252)

Discontinued business after tax

53,299

Profit after tax (FRS 3)

 

 

69,185

20,342

24,414

27,989

28,882

Profit after tax (norm)

 

 

15,886

20,342

24,414

27,989

28,882

Average Number of Shares Outstanding (m)

12.0

12.0

12.1

12.1

12.1

Diluted EPS (p)

 

 

576.5

169.1

202.4

232.0

239.4

EPS - normalised (p)

 

 

132.4

169.1

202.4

232.0

239.4

Dividend per share (p)

201.0

91.0

105.0

118.0

120.0

EBITDA margin (%)

47.5%

44.8%

41.7%

47.6%

45.0%

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

47.0%

44.4%

41.3%

47.1%

44.5%

Return on equity

15.2%

15.2%

16.7%

17.6%

16.8%

BALANCE SHEET

Non-current assets

 

 

103,653

138,004

181,015

185,383

197,806

Current assets

 

 

61,903

57,763

84,178

95,430

108,275

Total assets

 

 

165,556

195,767

265,193

280,813

306,081

Current liabilities

 

 

(6,850)

(17,850)

(7,927)

(6,722)

(7,424)

Non-current liabilities inc pref

(30,450)

(38,450)

(104,450)

(108,724)

(119,183)

Net assets

 

 

128,256

139,467

152,816

165,367

179,474

NAV per share (p)

1,084

1,177

1,276

1,375

1,493

CASH FLOW

Operating cash flow

 

 

(16,017)

(27,431)

(43,418)

10,530

4,946

Net cash from investing activities

80,716

(308)

(1,040)

(785)

(265)

Dividends paid

(23,090)

(9,548)

(11,377)

(13,080)

(14,461)

Other financing (excluding change in borrowing)

55

21

12

14

14

Net cash flow

 

 

41,664

(37,266)

(55,823)

(3,321)

(9,766)

Opening net (debt)/cash

 

 

(53,565)

(11,901)

(49,167)

(104,990)

(108,311)

Closing net (debt)/cash

 

 

(11,901)

(49,167)

(104,990)

(108,311)

(118,077)

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


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

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the 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.

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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).

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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.

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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

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