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Currency in GBP
Last close As at 09/06/2023
GBP24.00
▲ −10.00 (−0.41%)
Market capitalisation
GBP292m
Research: Financials
S&U’s lending growth has been ahead of expectations in H123, despite relatively weak consumer confidence and a conservative underwriting policy. Credit quality has also remained high and the group continues work to underpin this for the future. This and the group’s experience of previous credit cycles should stand it in good stead to address the potential pressures arising from economic headwinds.
S&U |
H1 growth ahead of expectations |
H123 update |
Financial services |
11 August 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 lending growth has been ahead of expectations in H123, despite relatively weak consumer confidence and a conservative underwriting policy. Credit quality has also remained high and the group continues work to underpin this for the future. This and the group’s experience of previous credit cycles should stand it in good stead to address the potential pressures arising from economic headwinds.
Year end |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
01/21 |
83.8 |
18.1 |
120.7 |
90.0 |
19.5 |
3.8 |
01/22 |
87.9 |
47.0 |
312.7 |
126.0 |
7.5 |
5.4 |
01/23e |
100.2 |
40.3 |
268.9 |
130.0 |
8.7 |
5.5 |
01/24e |
109.4 |
43.1 |
269.7 |
133.0 |
8.7 |
5.7 |
Note: *PBT and EPS are reported. EPS are diluted.
Positive trading update for May to July
S&U acknowledges the uncertain economic background, with growing pressure on household incomes, but its trading update ahead of its H123 results (due 27 September) is positive. Growth in lending has been ahead of budget and expectations, resulting in total receivables of £370m at the end of July, compared with £340m at the time of the AGM update in May and above our previous full year estimate of £366m. At Advantage, motor finance applications remain strong and transactions in the period rose by nearly 25% y-o-y, with receivables increasing from £268m in May to c £280m. Credit quality is also high with strong collections, lower bad debts and reduced voluntary terminations. Further scorecard revisions and increased affordability buffers have been introduced to allow for the impact of inflation on customers. Aspen property bridging net receivables were £90m versus £72m in May. As the business has become more established, it has attracted more experienced borrowers contributing to a higher average loan size (£875,000), boosting growth while resulting in a slightly lower average book yield.
Estimates increased slightly
Mindful of the uncertain macroeconomic and political background we have taken a measured approach when updating our estimates. We have allowed for the growth in receivables in H123 but assume the growth rate moderates in H223 and FY24. We have also allowed for an increase in the cost of funding and some increase in staff and other costs with inflation. The net effect is an increase in estimated EPS for FY23 and FY24 of 2.6% and 1% respectively.
Valuation
S&U shares trade on a prospective multiple of under 9x on our revised earnings forecast and a yield of over 5%. An ROE/COE model implies a cautious market expectation of a sustainable return on equity of 13%, compared with our estimate of more than 15% for the current year.
Background
Here we provide an update on some of the indicators we monitor when assessing trends in the markets for the Advantage and Aspen businesses.
Exhibit 1 shows recent independent economic forecasts collected by HM Treasury. Since May, when we published a note following S&U’s AGM update, GDP forecasts have been reduced (for 2023 from 1.4% to 0.8%). The expected level of unemployment is virtually unchanged, reflecting the current starting point of a particularly tight labour market. In its August Monetary Policy Report the Bank of England, in its baseline projections, looks for a slightly higher rate of unemployment at 4.4% in Q3 of CY23 than the average (for Q4) shown below. However, it does see this rising, to 5.5% and 6.3% in the following two years, given a weaker growth outlook, potentially introducing greater slack in the economy. On inflation, both independent and Bank of England forecasts have increased markedly. For Q3 of CY23 the Bank expects the rate to remain above 9%: towards the upper end of the range of independent forecasts shown below.
Exhibit 1: Comparison of independent economic forecasts for the UK (July)
% |
Average |
Low |
High |
GDP growth |
|||
2022 |
3.7 |
3.0 |
5.6 |
2023 |
0.8 |
0.0 |
2.2 |
Labour Force Survey unemployment rate Q4 |
|||
2022 |
4.0 |
3.3 |
5.0 |
2023 |
4.1 |
3.2 |
4.8 |
Inflation Q4 (CPI) |
|||
2022 |
9.0 |
5.8 |
11.1 |
2023 |
3.6 |
1.1 |
12.6 |
Source: HM Treasury
Exhibit 2 shows how consumer confidence staged a major recovery last year 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. The most recent reading shows a levelling off in the decline. Cost-of-living pressures are potentially particularly relevant for Advantage customers, although the company has previously noted that wages are likely to adjust and that its customers tend to depend on their vehicles for transport to work. Advantage has made an allowance for the rise in inflation within its affordability calculations. It remains to be seen what the impact of possible further government measures to mitigate cost pressures will be.
|
Exhibit 2: GfK UK consumer confidence indicator |
Exhibit 3: UK redundancies and unemployment |
|
|
|
Source: Refinitiv (last value July 2022) |
Source: ONS (last value May 2022) |
|
Exhibit 2: GfK UK consumer confidence indicator |
|
|
Source: Refinitiv (last value July 2022) |
|
Exhibit 3: UK redundancies and unemployment |
|
|
Source: ONS (last value May 2022) |
In Exhibit 3 we can see that, after an increase in 2020, the unemployment rate has since moved noticeably below prior levels. The level of redundancies, a more immediate measure, saw a very sharp spike as the pandemic took hold, but fell rapidly and is now clearly below pre-pandemic levels. As discussed above, some increase in these measures seems likely in due course given the trend in forecasts.
Next, we look at data on used car transactions and used car finance. Exhibit 4 compares the monthly sales pattern in the four years from 2019–22. 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 was close to pre-pandemic levels, as represented here by the 2019 monthly figures, although supply limitations resulting from constraints on new car production tempered volumes. This remains a factor in 2022 and first-half used car transaction volume was down 13% compared with the first half of 2019. Exhibit 5 shows a similar pattern in used car finance, with seasonal dips evident in addition to lockdown impacts. Calendar 2022 started strongly although the trend in Q2 has been weaker than in Q1, with a small decline in car finance transaction volumes year-on-year, while the value of loans has still increased.
|
Exhibit 4: Monthly used car transactions 2019–22 |
Exhibit 5: Used car finance through dealerships |
|
|
|
Source: SMMT (last value June 2022). |
Source: Finance and Leasing Association (last value June 2022). |
|
Exhibit 4: Monthly used car transactions 2019–22 |
|
|
Source: SMMT (last value June 2022). |
|
Exhibit 5: Used car finance through dealerships |
|
|
Source: Finance and Leasing Association (last value June 2022). |
Used car prices (see Exhibit 6) were buoyant in 2020 and then experienced a very sharp step up from mid-2021, with strong consumer demand and reduced supply pushing prices up. Since February this year the index has seen small month-on-month decreases (see Exhibit 7), suggesting a slight softening of demand and/or easing of supply constraints. Nevertheless, prices remain at a historically high level and, as evidenced by the transaction and finance data above, demand is also still relatively strong. 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.
|
Exhibit 6: Second-hand car price index |
Exhibit 7: Monthly change in second-hand car prices |
|
|
|
Source: ONS CPI index (last value June 2022) |
Source: ONS CPI index, m-o-m % change |
|
Exhibit 6: Second-hand car price index |
|
|
Source: ONS CPI index (last value June 2022) |
|
Exhibit 7: Monthly change in second-hand car prices |
|
|
Source: ONS CPI index, m-o-m % change |
Turning to the background for Aspen Bridging, Exhibit 8 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, for June 2022, shows an activity level similar to pre-pandemic levels. Reduced consumer confidence and higher interest rates may affect prospective transaction volumes. However, 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. As noted in the update statement, it has recently been attracting more seasoned borrowers, which has contributed to a larger average loan size.
|
Exhibit 8: UK property transactions (seasonally adjusted) |
|
|
Source: HM Revenue & Customs. Note: Figures for April to June 2022 are provisional. SA = seasonally adjusted. |
Estimate changes
Following the trading update, we have adjusted our estimates with the key figures shown below and further details given in the financial summary (Exhibit 9). The main changes we have made in our assumptions are to increase the growth in customer receivables to reflect the progress made in the first half of FY23, while factoring in more moderate growth in the second half and FY24. We now look for year-end net customer receivables of £393m and £423m for FY23 and FY24 respectively (previously £366m and £399m). Interest cost is increased to allow for higher rates and funding the larger loan book. S&U notes that administration costs are being controlled within budget, but we have assumed a marginally higher cost income ratio to allow for staff and other cost increases with higher inflation. The cost of sales is also higher on increased assumed transaction volumes.
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 (%) |
|
FY23e |
95.6 |
100.2 |
4.9% |
39.3 |
40.3 |
2.6% |
262.0 |
268.9 |
2.6% |
130.0 |
130.0 |
0.0% |
FY24e |
105.8 |
109.4 |
3.5% |
42.7 |
43.1 |
1.0% |
267.0 |
269.7 |
1.0% |
133.0 |
133.0 |
0.0% |
Source: Edison Investment Research
Valuation
Unsurprisingly, the trading update prompted share price strength following a period of weakness. Even so, on our revised numbers, S&U trades on a prospective multiple of 8.7x for FY23. At a share price of 2,350p, an ROE/COE model with an assumed cost of equity (COE) of 10% and long-term growth of 2% suggests the market is assuming a return on equity (ROE) of 13%. This compares with our estimate of over 15% for FY23.
Exhibit 9: Financial summary
£'000s |
2018 |
2019 |
2020 |
2021 |
2022 |
2023e |
2024e |
||
Year end 31 January |
|||||||||
PROFIT & LOSS |
|||||||||
Revenue |
|
|
79,781 |
82,970 |
89,939 |
83,761 |
87,889 |
100,221 |
109,428 |
Impairments |
(19,596) |
(16,941) |
(17,220) |
(36,705) |
(4,120) |
(16,213) |
(19,910) |
||
Other cost of sales |
(17,284) |
(15,751) |
(19,872) |
(14,264) |
(18,771) |
(22,906) |
(22,747) |
||
Administration expenses |
(9,629) |
(10,763) |
(12,413) |
(10,576) |
(13,679) |
(14,031) |
(15,320) |
||
EBITDA |
|
|
33,272 |
39,515 |
40,434 |
22,216 |
51,319 |
47,072 |
51,451 |
Depreciation |
|
|
(294) |
(414) |
(450) |
(520) |
(529) |
(482) |
(449) |
Op. profit (incl. share-based payouts pre-except.) |
|
|
32,978 |
39,101 |
39,984 |
21,696 |
50,790 |
46,590 |
51,001 |
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) |
(3,772) |
(6,265) |
(7,885) |
||
Profit before tax |
|
|
30,160 |
34,560 |
35,134 |
18,128 |
47,018 |
40,325 |
43,117 |
Tax |
(5,746) |
(6,571) |
(6,252) |
(3,482) |
(9,036) |
(7,662) |
(10,357) |
||
Profit after tax |
|
|
24,414 |
27,989 |
28,882 |
14,646 |
37,982 |
32,664 |
32,759 |
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 |
312.7 |
268.9 |
269.7 |
EPS - basic (p) |
|
|
203.8 |
233.2 |
239.6 |
120.7 |
312.8 |
269.0 |
269.8 |
Dividend per share (p) |
105.0 |
118.0 |
120.0 |
90.0 |
126.0 |
130.0 |
133.0 |
||
EBITDA margin (%) |
41.7% |
47.6% |
45.0% |
26.5% |
58.4% |
47.0% |
47.0% |
||
Operating margin (before GW and except.) (%) |
41.3% |
47.1% |
44.5% |
25.9% |
57.8% |
46.5% |
46.6% |
||
Return on equity |
16.7% |
17.6% |
16.8% |
8.1% |
19.6% |
15.2% |
14.1% |
||
BALANCE SHEET |
|||||||||
Non-current assets |
|
|
181,015 |
185,383 |
197,806 |
173,413 |
184,189 |
222,622 |
239,337 |
Current assets |
|
|
84,178 |
95,430 |
108,275 |
111,426 |
143,040 |
175,198 |
189,008 |
Total assets |
|
|
265,193 |
280,813 |
306,081 |
284,839 |
327,229 |
397,820 |
428,345 |
Current liabilities |
|
|
(7,927) |
(6,722) |
(7,424) |
(5,309) |
(8,789) |
(9,474) |
(9,803) |
Non current liabilities inc pref |
(104,450) |
(108,724) |
(119,183) |
(98,501) |
(111,693) |
(164,193) |
(177,493) |
||
Net assets |
|
|
152,816 |
165,367 |
179,474 |
181,029 |
206,747 |
224,153 |
241,049 |
NAV per share (p) |
1,276 |
1,375 |
1,493 |
1,490 |
1,704 |
1,847 |
1,987 |
||
CASH FLOW |
|||||||||
Operating cash flow |
|
|
(43,418) |
10,530 |
4,946 |
32,940 |
(2,094) |
(36,736) |
3,350 |
Net cash from investing activities |
(1,040) |
(785) |
(265) |
(1,112) |
(284) |
(310) |
(310) |
||
Dividends paid |
(11,377) |
(13,080) |
(14,461) |
(13,098) |
(12,263) |
(15,297) |
(15,904) |
||
Other financing (excluding change in borrowing) |
12 |
14 |
14 |
2 |
1 |
0 |
0 |
||
Net cash flow |
|
|
(55,823) |
(3,321) |
(9,766) |
18,732 |
(14,640) |
(52,344) |
(12,864) |
Opening net (debt)/cash |
|
|
(49,167) |
(104,990) |
(108,311) |
(118,077) |
(99,345) |
(113,985) |
(166,329) |
Closing net (debt)/cash |
|
|
(104,990) |
(108,311) |
(118,077) |
(99,345) |
(113,985) |
(166,329) |
(179,193) |
Source: S&U accounts, Edison Investment Research. Note: EPS on a reported basis.
|
|
Research: Real Estate
H1 revenue grew 3% against tough comparators and operating profit increased by 13% y-o-y, reflecting good underlying markets and M&A in lettings. The announcement also highlighted the strong contribution from M&A, where we expect Douglas & Gordon (D&G) alone to contribute c 45% of FY22 profit, an aspect we believe is overlooked by the market. We retain our underlying assumptions and our 128p per share valuation.
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