Positioned for recovery

The company is optimistic about the outcome of the Supreme Court commission disclosure ruling, expected by July 2025, which could affect most lenders, including S&U. Importantly S&U has no exposure to discretionary commission arrangements, which provides a significant advantage compared with many lenders in the motor finance sector. No impact is reflected in our forecasts. Aspen continues to develop strongly, with a 50% increase in PBT and a 17% rise in net receivables for the year.

Conservative balance sheet supports resilience

The group maintained its conservative financial management approach throughout FY25, reducing net borrowings to £192.3m (FY24: £224.4m), with a comfortable gearing ratio of 80.8% (FY24: 95.8%). The final dividend of 40p brings the total for the year to 100p, representing a yield of 6.6%. Looking forward, we expect the dividend growth to resume with FY26e DPS of 110p, representing a yield of 7.2%.

Valuation: Potential for recovery yet to be reflected

S&U’s long-term record of profitability (averaging 14% return on equity, ROE, over the five years to FY25) provides confidence that the current challenges will prove temporary. Trading at 7.9x FY26e earnings with a solid dividend yield and significant headroom on facilities, the shares offer attractive value as S&U transitions from consolidation to opportunity.

Aspen ascends while Advantage adapts

S&U is an established specialist lender with businesses addressing the non-prime motor finance and property bridging markets. Its origins lie in a business founded by the chairman's grandfather in 1938, which evolved into a home collected credit company. In 1999, a non-prime 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, providing the means of financing a £15m special dividend and investing in continued strong growth at Advantage and, subsequently, the formation of a new property bridging business (Aspen Bridging) in 2017.

Advantage motor finance has a record of strong, profitable growth. It was affected by the pandemic but has bounced back strongly, while continuing 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 the 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.

Two complementary divisions

S&U operates two complementary businesses in specialist lending markets:

• Advantage Finance: established in 1999, Advantage provides used car finance on hire-purchase to sub-prime and near-prime borrowers. Operating primarily through broker relationships (90%), Advantage has built a customer base of more than 55,000 customers through a focus on high-quality customer service and customised underwriting. A typical loan is around £9,250, with repayments of £15,530 over 55 months at a flat rate of 16.0%.
• Aspen Bridging: launched in 2017, Aspen provides short-term property bridging loans to smaller developers and builders, a market segment underserved by major lenders. The business has shown strong growth, with net receivables increasing by 17% to £152.2m, contributing £7.2m in PBT in FY25 (50% up on FY24).

Regulatory issues in the rear-view mirror, sensitive to economic cycle

• Regulatory environment: the motor finance industry faces significant regulatory scrutiny. The conclusion of the FCA's Cost of Living Forbearance outcomes review has required Advantage to implement enhanced affordability criteria and collections processes, with a £2.7m exceptional charge taken in FY25 for remediation costs. The regulatory and legal headwinds in the motor finance market negatively affected FY25, with ROE dropping to 8%. Despite this, there is a long-term record of profitability, with a 14% ROE over the five years to FY25 despite the dip in the pandemic to 8% in 2021.
• Commission disclosure legal challenge: the Supreme Court heard an appeal in April 2025 against an October 2024 Court of Appeal ruling regarding undisclosed commission payments to brokers. While S&U has no exposure to discretionary commission arrangements, the ruling could affect fixed-fee commission models. Management is optimistic about the outcome expected by July 2025.
• Economic conditions: the motor finance business is sensitive to unemployment levels, used car prices and consumer confidence. Aspen's property bridging business could be affected by a downturn in the housing market, although near-term indicators remain supportive.
• Competition: both businesses operate in competitive markets, although Aspen has established itself in a niche less served by larger lenders.

Summary of FY25 results

• Revenue stable at £115.6m (FY24: £115.4m), with growth in Aspen (£23.8m, +38%) offsetting a decline in Advantage (£91.8m, -6.5%).
• Profit before tax declined to £24.0m (FY24: £33.6m), including a £2.7m exceptional charge.
• Significant increase in impairment charge to £35.6m (FY24: £24.2m), primarily in motor finance.
• Group net receivables decreased to £435.8m (FY24: £462.9m), with Advantage down 15% to £283.6m and Aspen up 17% to £152.2m.
• Final dividend of 40p proposed, making total dividend of 100p (FY24: 120p).
• Reduced net borrowings of £192.3m (FY24: £224.4m) with significant headroom to facilities of £280m.
• Gearing ratio improved to 80.8% (FY24: 95.8%).

Valuation: Dividend a key element of the share price

Trading at a P/E of 10.3x FY25 earnings and 7.9x FY26e earnings, S&U shares reflect the regulatory uncertainty affecting the motor finance sector. The shares trade at a significant discount to historical valuation levels, with the FY25 ROE of 7.6% well below the five-year average of 14%.

The current share price implies a discount to book value, with strong potential for a re-rating as regulatory risks subside and Advantage returns to growth. The FY25 dividend yield of 6.6% offers attractive income support while awaiting a recovery in earnings.

Serving the non-prime motor finance market since 1999

Advantage Finance is based in Grimsby and provides used car finance on hire-purchase agreements to sub-prime and near-prime borrowers. Distribution is 90% through brokers, 5% direct through dealers and 5% through refinancing for previous customers. S&U has relationships with the largest UK brokers, providing 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. Advantage’s in-house IT capability is an important enabler for the business as it helps maintain a high-speed response to loan applications and quick adjustments to systems to meet business requirements. Currently, a typical loan is around £9,250, with £15,530 repayable, including interest at a flat rate of 16.0% over an average term of about 55 months.

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. 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 like Advantage. In FY21, the impact of the pandemic on transactions and revenues was magnified for profitability as increased provisioning almost halved the pre-tax margin, but the business quickly recovered and receivables reached a new record high in FY24. During FY25, the FCA’s review of Cost of Living Forbearance outcomes, which began in 2023, had a significant impact. As part of a Section 166^[1] engagement with the FCA, Advantage placed voluntary restrictions on its collections processes. The uncertainty this created prompted it to adopt a cautious approach to new lending and managed reduction in the lending book, although average balances in FY25 were above the prior year. End-FY25 net loans of £284m compared with £332m at end FY24, with effectively all of the decline coming in H2. With the regulatory review completed, uncertainty about collections processes removed and an amended procedure in place, lending has begun to increase again. Collections activity has begun to recover in recent months and, with leading indicators for credit quality also pointing upwards, S&U is confident that this will continue on a sustainable basis.

The number of transactions and new lending reduced significantly during FY25, with a noticeable tilt towards higher-quality, lower-risk lending. Collections activity faced significant challenges during the year, as evidenced by the decrease in customers making on-time payments. The share of gross receivables where payments were up to date was 65% in FY25, down from 74% in the prior year. This resulted in a substantial build-up of accounts with arrears of more than six months. However, collections performance has begun to improve in recent months, with repayment adherence in February increasing to 88% and to 91% in March. The lifting of voluntary regulatory restrictions and implementation of a significant retraining programme for collections staff is already boosting performance. Management expects this positive trend to continue as the enhanced collection procedures agreed with the FCA are fully implemented, which should gradually reduce the elevated arrears levels.

Advantage’s gross profits before impairment were broadly flat in FY25 compared with the previous year, with lower revenues offset by lower transaction costs. With the impact of reduced receivables balances having a greater impact in H2, gross profit was lower versus H1. Due to the increase in impairment charges, FY25 PBT (excluding charges) of £19m was down by one-third compared with the prior year. The £2.7m exceptional charge relates to the closure of the Section 166 review and the expected costs of remediation (see below).

Regulatory and legal issues have affected the broader market far more than S&U

The regulatory and legal challenges in the motor finance industry have been very significant in the last year, but S&U has been much less affected than many peers and we expect this to remain the case.

S&U has no exposure to the FCA review of discretionary (or variable) commission arrangements, as it has never operated on this basis. These were banned by the FCA in 2021 but, previously, some lenders allowed finance brokers (in many cases car dealers acting as brokers) to adjust the interest rates they offered customers for car finance. The higher the interest rate, the more commission the broker received. An investigation into whether borrowers had been disadvantaged is ongoing and the conclusion was recently deferred pending a Supreme Court ruling. This ruling is yet to be delivered but is expected by July 2025, at which point the FCA expects to set out its next steps, including details of a potential customer redress scheme.

The Supreme Court hearing, held in April, stemmed from an Appeal Court ruling in October 2024 involving other lenders rather than S&U. The cases brought primarily related to discretionary commission arrangements but, in a surprise judgment based on its interpretation of common law, the court found that finance brokers and (in the case of S&U) car dealers could not lawfully receive any commission from a lender without informed borrower consent, including knowledge of the exact amount of commission paid. FCA rules, to which S&U adhered, have long required that borrowers should be informed if their loan costs include commission paid by lenders to brokers, but not necessarily the amount, and the court ruling opened the door to claims against both brokers and lenders. Given the significant implications of the ruling across the wider consumer finance sector, the FCA, along with many industry participants and trade bodies, made representations to the Supreme Court and, although it remains uncertain, S&U is optimistic that the court decision will reflect this. Regardless of whether the Court of Appeal decision is upheld, we find it difficult to believe that the fixed-fee commission models of the sort which Advantage operates are unfair.

Advantage offers motor finance mainly through independent credit broker intermediaries rather than more directly with dealers. From January 2013 to October 2024, only about 10% of transactions were written via dealers acting as credit brokers, on which £6m of commission was paid. Depending on the Supreme Court decision and any subsequent FCA arrangements for customers, the company believes that while a liability is possible, it is not probable. It has recognised a contingent liability in the accounts, but notes that at the current time it is not practicable to reliably estimate the potential financial effect. No impact is reflected in our forecasts.

Although it has now been settled, a live issue for Advantage during the year was the FCA’s multi-firm Cost of Living Forbearance outcomes review, begun in 2023. Advantage has agreed with the FCA, and implemented certain enhancements to its approach to arrears management and the application of forbearance, and has assessed where customers were adversely affected, primarily relating to late payment fees. The £2.7m that S&U has set aside includes expected customer remediation costs of £2.3m and associated costs of £0.4m.

It is worth noting the experience that S&U has built over 26 years in serving customers with often complex credit histories, as well as its strong complaints performance record. Just 15% of complaints against Advantage that were referred to the Financial Ombudsman Service over the last six months were upheld, the second-best performance in the sector.

We expect a recovery in Advantage’s earnings over the next two years

Our forecasts for Advantage are shown below. We expect PBT growth in FY26 to be driven by lower finance costs (reduced borrowing and lower average borrowing costs) and an improvement in impairment charges (improved collections and a recovery in previously impaired loans).

Aspen Bridging continues to increase its contribution

FY25 was another year of well controlled growth for Aspen, with gross lending, net receivables, repayments and PBT all reaching new high levels.

Group financial performance and funding

The table below provides a summary of the group-level financial performance, aggregating the strong progress at Aspen and a challenging year for Advantage. In the following sections, we look at each of these businesses in detail. At the group level:

• Revenues for the year were stable at £115.6m, but lower in H2 than in H1 as the motor finance loan book reduced.
• The significant increase in impairments, reflecting increased motor finance arrears, was partly offset by lower costs of business acquisition, leaving gross profit 7% lower at £64m. H2 gross profit was slightly up on H1.
• Administrative costs were tightly controlled and declined by 5% despite the additional regulatory burdens.
• Net finance expense increased by £3.0m or 20%,related to higher average borrowing in H125 and the higher average floating rate borrowing costs. Net loan receivables were lower at end FY25 than at end FY24 but the reduction came during H2.
• A non-recurring exceptional charge of £2.7m was taken in respect of the now concluded FCA Cost of Living Forbearance outcomes review, crystallising the previously held contingent liability.
• PBT was £24.0m, down from £33.6m in FY24.
• Net profit was £17.9m (FY24: £29.6m) and EPS was 147.4p (FY24: 209.2p). Excluding the exceptional charge (and related tax effects), we estimate that EPS would have been 165p.
• A final DPS of 40p was declared (H224: 50p), taking the total for the year to 100p (FY24: 120p) a payout of 68%.

S&U has a strong and very simple balance sheet comprising mainly customer receivables, supported by borrowings and equity. Comprising a £49m reduction in motor finance receivables and a £22m increase in property bridging receivables, total net receivables were £27m lower. Gross borrowing declined £26m and, adjusted for cash, net borrowings declined by £32m. Equity increased slightly through retained earnings. Gearing (net debt/equity) was a comfortable 81% and should be viewed in the context of annual repayments on the group’s lending of £396m (FY23: £370m).

Borrowings have reduced further since year-end such that S&U has c £100m of borrowing headroom to its total committed facilities of £280m. These comprise a £230m three-year club revolving credit facility and two £25m term loans. All borrowings are floating rate, and we estimate a blended lending margin over the SONIA benchmark of 3.2%.

The maturity of the club facility was extended by one year in FY25, to May 2027, and S&U has an option to extend this by a further year. The term loans mature in 2028 and 2029.

Economic and market background

In this section, we have updated the charts we used to provide background indicators for Advantage and Aspen. In summary, although the UK is experiencing sluggish growth with weak consumer and business sentiment, the implications of US tariff policy remain highly uncertain and are yet to be reflected in most data and forecasts. Nonetheless, the labour market has remained firm and, importantly for Advantage, redundancies have shown no clear uptick. Real wages continue to grow. With further rate cuts anticipated, the housing market remains robust, providing a favourable environment for Aspen’s customers.

Key economic indicators

Provisional UK GDP data for February 2025 surprised on the upside, with a monthly increase of 0.5%, broadly spread across all main sectors, taking three-month growth to 0.6% compared with the three months to November 2024. The provisional data are always subject to revision and yet to capture the impact of the tariff war, significant increases in utility and other prices from April, along with the increased National Insurance burden on employers. Ahead of the tariff war, the compilation of GDP forecasts for 2025 collected by the Treasury had been trending downwards in recent months and the risks to growth appear to have increased. The consensus expectation for 2025 GDP growth is 1.0%, slightly down on 2024 (1.1%), continuing the sluggish pattern of the past three years. Meanwhile, expectations for inflation and unemployment have been trending slightly upwards. In its March 2025 meeting, the Bank of England Monetary Policy Committee voted eight to one to maintain the base rate at 4.5%, noting that inflation remains above its 2% target, but indicating that it was ready to respond to a faster than expected weakening in the economy. Money markets are currently anticipating three quarterly reductions of 25bp by the end of 2025.

Consumer price inflation (CPI) is well below the 2022 peak of 11% and the annual rate has fallen in each of the past two months, to 2.6% in the 12 months to March 2025. The rate is expected to increase in the coming months, before resuming its downward trend, with a consensus forecast of 3.0% by the end of the year and the most recent estimates suggesting 3.1%. A whole raft of price increases in April included domestic utilities and council tax, TV licences, and phone and broadband contracts. There is strong evidence that many businesses have responded quickly to the increase in employers’ National Insurance contributions by putting up prices.

Unemployment in the UK remains low in a historical context and has been broadly stable in recent months. It was 4.4% in the three months to February 2025, in line with both the five- and 10-year averages, but around half the peak level in late 2011. Consensus estimates show a modest increase to around 4.7% over the next two years.

It is too early to anticipate the impact of the tariff war or even how it is likely to be applied. Notwithstanding a heavy service element in UK exports (such as banking and insurance), it is difficult to avoid the global and domestic risks to GDP growth and inflation, with the potential for any negative impact on the government budget to lead to further increases in taxation.

The overall consumer confidence indicator score to March 2025 showed no material impact from the deteriorating UK economic outlook, although it remains at a subdued level. It is nonetheless well above the multi-year lows seen at the height of the cost of living crisis in mid-2022 to early 2023, but at -19 in March (+1 vs February) is below the long-run average of -10. Confidence showed signs of building in the first half of 2024 but fell back as the new Labour government managed down near-term expectations and paved the way for increased taxes and selective expenditure cuts in the October 2024 budget. The March improvement in consumer confidence reflected some optimism around personal finances in contrast to sharply negative perceptions for the broader economy. This will reflect low unemployment, increasing real wages, strong average personal balance sheets (although with significant variation) and the prospect of further interest rate reductions. Most recent official data for September to November 2024 show that annual growth in employees' average earnings for both regular (excluding bonuses) and total earnings (including bonuses) was 5.6%, c 3% above CPI. Annual average regular earnings growth for the private sector was 6.0%, while for the public sector it was 4.1%.

Indicators for Advantage motor finance

The data we have gathered from various sources indicate a healthy used car market in the year to date, with sales increasing and prices stabilising, while the number of cars financed has remained about the same, although the value of financings is lower. Data from the Society of Motor Manufacturers and Traders (SMMT) showed a continued increase in used car sales through Q224 (+7% vs Q1). Sales in the first half of the year are up 7% versus the prior year period.

On a rolling 12-month basis, data from the Finance and Leasing Association show a stabilisation in the volume of used cars financed in recent months, down 1% in the first eight months of the year compared with the same period in 2023. However, the value of transactions has drifted lower.

Second-hand car prices have been broadly stable over the last 12 months, following a period of significant weakness in the second half of 2023. March data show a 1% increase over the preceding three- and 12-month periods, including solid gains in February (+0.5% month-on-month) and March (0.8%). Some in the industry expect prices to benefit from tighter supply as relatively low number of new car registrations coming out of the pandemic work through the used car market. 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. Used vehicle prices increased during the years ended 31 January 2022 and 31 January 2023, then decreased during the year ended 31 January 2024. With the FY25 prelims announcement, S&U indicated that it is assuming vehicle prices will remain stable, after considering market trends and expectations, but there remains uncertainty around this. If used car prices were assumed to fall by 5%, this would result in an increase in the loan loss provision of £2.8m. Conversely, if used car prices were assumed to increase by 5%, this would result in a decrease in the loan loss provision of £2.8m.

Indicators for Aspen property bridging

Fundamentally, the UK housing market is underpinned by a chronic shortage of housing of all types. The new Labour government has plans to build 1.5 million new homes during the life of this parliament. This is generally considered to be a challenging target, with 2024 completions around half this level and the lowest for several years, but there are already indications that changes to planning rules may provide a significant boost to construction. Aspen benefits indirectly from the UK housing and mortgage markets as its borrowers depend on transaction activity to complete projects and recycle capital.

Data to February show a strong increase in residential property transactions (mirrored to a lesser extent in the commercial market) as buyers rushed to complete ahead of the changes to Stamp Duty in April. On a seasonally adjusted basis, transactions increased by 13% on the month and were 28% above the level of February 2024. It seems likely that activity will be somewhat soft over the coming months since it has been brought forward, although the underlying market appears to be firm. Transactions for the whole of 2024, ahead of the early 2025 surge, were c 10% above the level of 2023 but still around 7% below the five-year quarterly average. Mortgage approvals have also been recovering from late 2023, supported by lower mortgage rates and real wage growth, and were up by 30% during 2024. The recent trailing off likely reflects the front-loading of approvals sought ahead of the Stamp Duty changes. Halifax data show a 2024 increase in average prices of 4.8%, but expect a slowdown in 2025. In March, average prices were 0.5% lower, again likely to have been affected by the Stamp Duty changes, and the annual rate of increase was 2.8%.

Mortgage rates have been on a downward trend in recent months, although interrupted for a time as longer-term borrowing costs reflected in the gilt market increased following the October budget. Yet to be shown in the data below, rates have recently continued to decline, reflecting the heightened market expectation for interest rate reductions resulting from the tariff war.