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Research: Financials
S&U’s Q422 trading update was positive, indicating that both Advantage motor finance and Aspen Bridging are set to beat FY22 profit expectations. The main positive surprise is an exceptionally low impairment charge at Advantage, which is likely to normalise in FY23, while the group is not immune to economic uncertainty. However, both businesses are making good progress and appear well-placed to achieve medium-term growth.
S&U |
FY22 profit beat and positive outlook |
Q422 trading update |
Financial services |
11 February 2022 |
Share price performance
Business description
Next events
Analysts
S&U is a research client of Edison Investment Research Limited |
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S&U’s Q422 trading update was positive, indicating that both Advantage motor finance and Aspen Bridging are set to beat FY22 profit expectations. The main positive surprise is an exceptionally low impairment charge at Advantage, which is likely to normalise in FY23, while the group is not immune to economic uncertainty. However, both businesses are making good progress and appear well-placed to achieve medium-term growth.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
||||||
01/21 |
83.8 |
18.1 |
120.7 |
90.0 |
23.4 |
3.2 |
||||||
01/22e |
87.6 |
45.0 |
300.1 |
120.0 |
9.4 |
4.2 |
||||||
01/23e |
95.6 |
38.5 |
256.9 |
127.0 |
11.0 |
4.5 |
||||||
01/24e |
104.2 |
41.5 |
259.4 |
129.0 |
10.9 |
4.6 |
||||||
Note: *PBT and EPS are reported. EPS are diluted.
Advantage motor finance
S&U looks for Advantage’s FY22 profits to be roughly double last year’s £17.2m. The company has maintained its focus on customer relations, refinement of credit controls and cost discipline but the main variance compared with our previous estimates for the business is likely to be a sharply lower level of bad debt provision in H222 following the COVID-19 boosted figure for FY21 (a pattern also seen in banks and other specialist lenders). Voluntary terminations are also running at a lower-than-expected rate. Prospectively, transaction numbers are still restrained by a used a vehicle supply shortage (in turn the result of new car supply constraints), but this limitation is expected to ease during FY23. We expect provisions to normalise and note that cost of living pressures on consumers are set to rise, though current collection rates are high and earlier tightening of credit criteria should still be beneficial.
Aspen bridging finance
At Aspen the strength in residential property transactions and price levels has been helpful and credit quality has remained strong. The year-end loan book stood at c £64m and further expansion is expected, supported by expansion of the team and their growing experience. S&U expects the business to continue to grow significantly in scale while paying close attention to credit risk.
Estimates and valuation
We have increased our EPS estimate for FY22 by 16%, reflecting the commentary on Advantage and Aspen profitability in the update with the main driver being a reduction in the assumed impairment charge at Advantage. Estimates for FY23 and FY24 are only marginally changed and allow for an assumed normalisation of impairment charges and the introduction of a 25% corporation tax rate in FY24. The FY22 P/E therefore falls to 9.4x before rising to c 11x in FY23 and FY24. We have raised our FY22 dividend assumption from 115p to 120p, giving a yield of 4.2%.
Background
In this section, we update the background data we track as indicators for Advantage and Aspen, starting with economic and industry figures relevant for the used car finance market.
Exhibit 1 shows independent forecasts for UK GDP and unemployment as collected by the UK Treasury in January. Compared with the November data shown in our last note, most movements are modest, although estimates for unemployment have continued to move lower. This should be a positive indicator for Advantage as unemployment is an important sensitivity for credit risk and ties in with S&U’s recent experience of credit quality.
Exhibit 1: Comparison of independent economic forecasts for the UK (January)
% |
Average |
Average of new forecasts |
Low |
High |
GDP growth |
||||
2021 |
7.0 |
7.1 |
6.6 |
7.2 |
2022 |
4.5 |
4.4 |
3.5 |
5.7 |
Labour Force Survey unemployment rate Q4 |
||||
2021 |
4.4 |
4.4 |
4.0 |
4.7 |
2022 |
4.2 |
4.1 |
3.6 |
4.7 |
Source: HM Treasury
Exhibit 2 shows that consumer confidence staged a major recovery last year prior to softening again as the Omicron variant took hold and economic concerns rose. Prospectively, uncertainties remain with cost-of-living pressures potentially pertinent for Advantage customers. Exhibit 3 shows that, after an increase, the unemployment rate has moved close to prior levels while, as mentioned above, forecasts have also been falling. The level of redundancies, a more immediate measure, saw a very sharp spike as the pandemic took hold, but fell rapidly and is now at or below pre-pandemic levels.
|
Exhibit 2: GfK UK consumer confidence indicator |
Exhibit 3: UK redundancies and unemployment |
|
|
|
Source: Refinitiv (last value January 2022) |
Source: ONS (last value November 2021) |
|
Exhibit 2: GfK UK consumer confidence indicator |
|
|
Source: Refinitiv (last value January 2022) |
|
Exhibit 3: UK redundancies and unemployment |
|
|
Source: ONS (last value November 2021) |
Next we look at data on used car transactions and used car finance. Exhibit 4 compares the monthly sales pattern in the three years 2019-21. This highlights the sharp drop in used car transactions in April 2020. Volume recovered very well following the initial lockdown, albeit with a further dip following subsequent lockdowns. Since April 2021 activity has been close to pre-pandemic levels, as represented here by the 2019 monthly figures, although the April bounce was smaller than industry participants had thought possible. The final quarter of 2021 saw volumes below the 2019 level, probably reflecting the prevailing supply limitations. Exhibit 5 shows a similar pattern in used car finance.
|
Exhibit 4: Monthly used car transactions 2019–21 |
Exhibit 5: Used car finance through dealerships |
|
|
|
Source: SMMT. Note: Last value December 2021. |
Source: Finance and Leasing Association. Note: Last value November. |
|
Exhibit 4: Monthly used car transactions 2019–21 |
|
|
Source: SMMT. Note: Last value December 2021. |
|
Exhibit 5: Used car finance through dealerships |
|
|
Source: Finance and Leasing Association. Note: Last value November. |
Used car prices (see Exhibit 6) were buoyant in 2020 and have seen a sharp step up since July 2021, with strong consumer demand and reduced supply pushing prices up. The ONS data are fully supported by marked strength in the Autotrader retail price index. An improving supply of new cars and hence used stock seems likely during 2022. At the margin a fall in auction prices would be a negative for Advantage, but its exposure here through repossessed car sales is moderated by the relatively low value of vehicles it finances. Also, for the moment, the demand side of the equation seems likely to remain robust.
|
Exhibit 6: Second-hand car prices (CPI index) |
|
|
Source: ONS (last value December 2021) |
Turning to the background for Aspen Bridging, Exhibit 7 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. The latest reading here, for December 2021, shows a return to pre-pandemic levels and S&U reports January 2022 transactions were strong. On a longer view, S&U sees 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 should also have significant scope for expansion now that it is more established in the market. Aspen’s involvement in the Coronavirus Business Interruption Loan Scheme has given it useful access to larger and more established developer customers although these loans have tended to be repaid faster than expected reflecting the buoyant market for completed developments.
|
Exhibit 7: UK property transactions (seasonally adjusted) |
|
|
Source: HM Revenue & Customs. Note: Figures for October to December 2021 are provisional. SA = seasonally adjusted. |
Changes in estimates and funding position
Changes in key numbers from our estimates are shown in Exhibit 8 and further details are included in the financial summary, Exhibit 9. For FY22 the 16% increase in pre-tax profit and EPS estimates mainly reflects a lower-than-expected level of impairments at Advantage and a modestly higher level of revenue. For FY23 and FY24 the changes are limited.
Exhibit 8: Changes to estimates
Year-end |
Revenue (£m) |
PBT (£m) |
EPS (p) |
DPS (p) |
||||||||
Old |
New |
Change (%) |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
|
FY22e |
86.5 |
87.6 |
1.3% |
38.7 |
45.0 |
16.2% |
258.2 |
300.1 |
16.2% |
115.0 |
120.0 |
4.3% |
FY23e |
95.2 |
95.6 |
0.5% |
38.0 |
38.5 |
1.5% |
253.1 |
256.9 |
1.5% |
127.0 |
127.0 |
0.0% |
FY24e |
103.7 |
104.2 |
0.5% |
41.0 |
41.5 |
1.0% |
256.7 |
259.4 |
1.0% |
129.0 |
129.0 |
0.0% |
Source: Edison Investment Research
Year-end borrowing was £114m and gearing an estimated 55%. The group retains good funding headroom with facilities of £180m.
Exhibit 9: Financial summary
£'000s |
2018 |
2019 |
2020 |
2021 |
2022e |
2023e |
2024e |
||
Year end 31 January |
|||||||||
PROFIT & LOSS |
|||||||||
Revenue |
|
|
79,781 |
82,970 |
89,939 |
83,761 |
87,613 |
95,599 |
104,243 |
Impairments |
(19,596) |
(16,941) |
(17,220) |
(36,705) |
(6,447) |
(17,288) |
(20,602) |
||
Other cost of sales |
(17,284) |
(15,751) |
(19,872) |
(14,264) |
(18,896) |
(21,544) |
(21,663) |
||
Administration expenses |
(9,629) |
(10,763) |
(12,413) |
(10,576) |
(13,058) |
(13,193) |
(14,386) |
||
EBITDA |
|
|
33,272 |
39,515 |
40,434 |
22,216 |
49,211 |
43,574 |
47,593 |
Depreciation |
|
|
(294) |
(414) |
(450) |
(520) |
(527) |
(487) |
(451) |
Op. profit (incl. share-based payouts pre-except.) |
|
|
32,978 |
39,101 |
39,984 |
21,696 |
48,684 |
43,087 |
47,142 |
Exceptionals |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Non recurring items |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Investment revenues / finance expense |
(2,818) |
(4,541) |
(4,850) |
(3,568) |
(3,679) |
(4,568) |
(5,676) |
||
Profit before tax |
|
|
30,160 |
34,560 |
35,134 |
18,128 |
45,004 |
38,520 |
41,465 |
Tax |
(5,746) |
(6,571) |
(6,252) |
(3,482) |
(8,551) |
(7,319) |
(9,962) |
||
Profit after tax |
|
|
24,414 |
27,989 |
28,882 |
14,646 |
36,453 |
31,201 |
31,504 |
Average Number of Shares Outstanding (m) |
12.1 |
12.1 |
12.1 |
12.1 |
12.1 |
12.1 |
12.1 |
||
Diluted EPS (p) |
|
|
202.4 |
232.0 |
239.4 |
120.7 |
300.1 |
256.9 |
259.4 |
EPS - basic (p) |
|
|
203.8 |
233.2 |
239.6 |
120.7 |
300.3 |
257.0 |
259.5 |
Dividend per share (p) |
105.0 |
118.0 |
120.0 |
90.0 |
120.0 |
127.0 |
129.0 |
||
EBITDA margin (%) |
41.7% |
47.6% |
45.0% |
26.5% |
56.2% |
45.6% |
45.7% |
||
Operating margin (before GW and except.) (%) |
41.3% |
47.1% |
44.5% |
25.9% |
55.6% |
45.1% |
45.2% |
||
Return on equity |
16.7% |
17.6% |
16.8% |
8.1% |
18.9% |
14.6% |
13.7% |
||
BALANCE SHEET |
|||||||||
Non-current assets |
|
|
181,015 |
185,383 |
197,806 |
173,413 |
204,838 |
228,083 |
247,250 |
Current assets |
|
|
84,178 |
95,430 |
108,275 |
111,426 |
121,629 |
141,356 |
152,945 |
Total assets |
|
|
265,193 |
280,813 |
306,081 |
284,839 |
326,468 |
369,439 |
400,195 |
Current liabilities |
|
|
(7,927) |
(6,722) |
(7,424) |
(5,309) |
(6,359) |
(6,739) |
(7,074) |
Non current liabilities inc pref |
(104,450) |
(108,724) |
(119,183) |
(98,501) |
(114,878) |
(140,798) |
(155,218) |
||
Net assets |
|
|
152,816 |
165,367 |
179,474 |
181,029 |
205,231 |
221,902 |
237,903 |
NAV per share (p) |
1,276 |
1,375 |
1,493 |
1,490 |
1,690 |
1,827 |
1,959 |
||
CASH FLOW |
|||||||||
Operating cash flow |
|
|
(43,418) |
10,530 |
4,946 |
32,940 |
(1,736) |
(11,066) |
990 |
Net cash from investing activities |
(1,040) |
(785) |
(265) |
(1,112) |
(302) |
(300) |
(300) |
||
Dividends paid |
(11,377) |
(13,080) |
(14,461) |
(13,098) |
(12,268) |
(14,569) |
(15,540) |
||
Other financing (excluding change in borrowing) |
12 |
14 |
14 |
2 |
1 |
0 |
0 |
||
Net cash flow |
|
|
(55,823) |
(3,321) |
(9,766) |
18,732 |
(14,305) |
(25,934) |
(14,850) |
Opening net (debt)/cash |
|
|
(49,167) |
(104,990) |
(108,311) |
(118,077) |
(99,345) |
(113,650) |
(139,585) |
Closing net (debt)/cash |
|
|
(104,990) |
(108,311) |
(118,077) |
(99,345) |
(113,650) |
(139,585) |
(154,435) |
Source: S&U accounts, Edison Investment Research. Note: EPS on a reported basis
|
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Research: TMT
Claranova reported revenue growth of 3% y-o-y in Q222 and 1% y-o-y for H122, with growth in Avanquest and myDevices offsetting a decline in the PlanetArt business. Management expects to see a gradual return to growth for PlanetArt as it adapts its customer acquisition strategy and consumers revert to pre-COVID buying patterns, as well as continued positive momentum for Avanquest. We have made minor changes to our revenue forecasts and maintain our EBITDA and EPS forecasts for FY22 and FY23.
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