S&U — FY22 profit beat and positive outlook

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Research: Financials

S&U — FY22 profit beat and positive outlook

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.

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Financials

S&U

FY22 profit beat and positive outlook

Q422 trading update

Financial services

11 February 2022

Price

2,830p

Market cap

£343m

Debt (£m) at 31 January 2022

114

Shares in issue

12.1m

Free float

28%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.8

(3.4)

27.7

Rel (local)

0.0

(5.9)

10.7

52-week high/low

2,950p

2,140p

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 that restrict their access to mainstream products. It has c 62,000 customers. The Aspen property bridging business has been developing, following its launch in early 2017.

Next events

FY22 results

29 March 2022

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

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

S&U’s 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*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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
January

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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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.

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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by S&U and prepared and issued by Edison, in consideration of a fee payable by S&U. Edison Investment Research standard fees are £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 2022 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.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 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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