S&U — Impairments drag FY24 PBT, moderation in FY25

S&U (LSE: SUS)

Last close As at 24/04/2024

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15.00 (0.79%)

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Research: Financials

S&U — Impairments drag FY24 PBT, moderation in FY25

In its trading update between December 2023 and January 2024, S&U announced that FY24 PBT will be 10% to 15% below consensus of c £38m. The key reason is lower collection rates in Advantage of 90% (H123: 94%) have prompted an increase in provisions. Management expects the collection rate to partially recover in the following months. Underpinned by an improving real estate market, Aspen continues to grow steadily with net receivables just over £130m (FY23: £114m). Elevated borrowing, at £224m, alongside higher interest rates have consequently doubled S&U’s interest payments to £15.1m (FY23: £7.5m). We have lowered our FY24 and FY25 PBT estimates by 12% and 8%, respectively.

Written by

Robert Murphy

Managing Director, Financials and Investment Trusts

Financials

S&U

Impairments drag FY24 PBT, moderation in FY25

Trading update

Financial services

29 February 2024

Price

1,830p

Market cap

£222m

Net debt (£m) at 11 December 2023

209

Shares in issue

12.2m

Free float

17.3%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(12.1)

(17.0)

(20.6)

Rel (local)

(11.8)

(19.0)

(17.9)

52-week high/low

2,570p

1,800p

Business description

S&U’s Advantage motor finance business lends on a simple HP basis to lower- and middle-income groups that may have impaired credit records restricting access to mainstream products. It has just over 66,500 customers. The Aspen property bridging business has been developing since its launch in 2017.

Next events

FY24 results

9 April 2024

Q125 update and AGM

6 June 2024

Analysts

Rob Murphy

+44 (0)20 3077 5700

Armando Hoxha

+44 (0)20 3077 5700

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

In its trading update between December 2023 and January 2024, S&U announced that FY24 PBT will be 10% to 15% below consensus of c £38m. The key reason is lower collection rates in Advantage of 90% (H123: 94%) have prompted an increase in provisions. Management expects the collection rate to partially recover in the following months. Underpinned by an improving real estate market, Aspen continues to grow steadily with net receivables just over £130m (FY23: £114m). Elevated borrowing, at £224m, alongside higher interest rates have consequently doubled S&U’s interest payments to £15.1m (FY23: £7.5m). We have lowered our FY24 and FY25 PBT estimates by 12% and 8%, respectively.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/22

87.9

47.0

312.7

126.0

5.9

6.9

01/23

102.7

41.4

277.5

133.0

6.6

7.3

01/24e

113.5

33.0

206.5

125.0

8.9

6.8

01/25e

129.1

36.4

224.6

125.0

8.1

6.8

Note: *PBT and EPS are reported. EPS is diluted.

Strains in Advantage, Aspen progressing well

Finance applications at Advantage remain robust, but loan advances in the period were 7% lower than last year as management exercises caution in its lending approach. Advantage announced that its discussions with the FCA regarding its industry-wide review into customer forbearance and affordability have deepened. It has since made preventative changes to its collection and repossession processes. Positively, the FCA has approved the appointment of Karl Werner as CEO of Advantage, succeeding Graham Wheeler. Aspen’s loan book continues to grow steadily and has now achieved a record £500m in gross lending since the company’s inception. Encouragingly, credit quality in Aspen remains robust – 15 out of 167 loans are beyond term (December 2023: 16).

PBT down on increased impairments

Responding to Advantage’s lower collection rate, we have increased our impairment assumptions in FY24 and FY25 by 19% and 3% to £21.1m and £23.5m. Credit quality remains sound in Aspen, so our impairment assumptions remain broadly unchanged. In line with management guidance, we have increased our interest cost expectations to £15.1m from our previous assumption of £14.4m. We broadly maintain our FY25 interest cost assumption of £18.4m. Consequently, we have cut our profit before tax (PBT) estimates for FY24 and FY25 by 12% and 8%, respectively, to £33.0m and £36.4m.

Valuation: Potential 17% accretion from current price

Using a return on equity/cost of equity (ROE/COE) model with an ROE of 10.9%, COE of 10% and a growth rate of 2%, the implied share price for S&U is 2,142p. This suggests a potential 17% appreciation. At its current share price, the market is pricing in an ROE of 9.6%, which is below the FY16–23 average of 16% and below our estimates of 10.9% in FY24 and 11.4% in FY25.

Forecast changes

Our revenue estimate for FY24 is 1% lower as we take into consideration S&U’s shift to larger and longer-term products to more creditworthy customers. As a result, we have forecast lower motor transactions, as management implements its more conservative approach to lending, and thus anticipate lower revenue yields. We anticipate that our increased revenue assumption within Aspen – projected revenue yields are slightly higher than we originally forecasted – will partially offset the downgrade in revenues in Advantage. We assume a similar scenario in FY25, with our group revenue forecast reduced by 3% to £129m, but still growing 14% y-o-y.

While impairment provisioning for Aspen in FY24 remains broadly unchanged, we increased our impairment assumption for Advantage by 18% to £21m in response to the drop in collections rate highlighted above and the accelerated impact of IFRS 9 provisioning requirements. Consequently, our group FY24 EBITDA estimate is lowered 7% to £48.7m. In FY25 we anticipate impairments in Advantage to moderate, forecasting £23.5m, 3% above our previous estimates. Our FY25 impairment assumption for Aspen remains unchanged. In response to inflationary pressures, we have adjusted our cost of sales assumption by 5% to £25.6m. Additionally, we have accounted for rising regulatory costs by increasing our administrative expense assumption by 2% to £22.9m. Group EBITDA, as a result, has fallen 5% to £55.2m.

A larger borrowing balance of £224m combined with higher interest costs has led to interest expenses being increased to £15.1m from our previous assumption of £14.1m. Hence, our FY24 PBT estimate has fallen 12% to £33.0m. In FY25 we expect borrowing to remain flat with FY24, so our interest cost assumption remains unchanged at £18.4m. Our FY25 PBT estimate is now 8% lower at £36.4m. Our EPS estimates for FY24 and FY25 have fallen 12% and 8%, in proportion with PBT declines.

We have also adjusted our FY24 DPS to 125p per share, down from our previous estimate of 133p per share, representing a payout ratio of 61% – away from the typical payout of 50% as S&U intends to ‘partially protect returns to shareholders’. Hence, we expect a DPS of 125p to be maintained in FY25.

Exhibit 1: Forecast changes

FY24

FY25

Old

New

Change

Old

New

Change

Revenue (£m)

114.2

113.5

(1%)

132.5

129.1

(3%)

EBITDA (£m)

52.5

48.7

(7%)

58.3

55.2

(5%)

PBT (£m)

37.5

33.0

(12%)

39.4

36.4

(8%)

EPS (p)

234.8

206.5

(12%)

242.9

224.6

(8%)

DPS (p)

133.0

125.0

(6%)

150.0

125.0

(17%)

Source: Edison Investment Research

Macroeconomic background

In this section we update our compilation of UK economic indicators relevant to consumer credit markets.

To summarise, there is little change in overall expectations. The GDP growth estimate for 2023 decreased to 0.4% compared to November and December 2023 forecasts of 0.5%. Unemployment expectations for Q423 have been held in line with December 2023 at 4.3%, but down from November’s expectation of 4.4%. Meanwhile, headline inflation in December 2023 clocked in at 4.0%, up from 3.9% in November 2023 – the first increase since February 2023. UK used car transactions and value of advances are in decline as consumers’ disposable income is choked by higher interest rates and inflation. The residential property market is more resilient than the vehicle market. Month-on-month residential transactions were down slightly whereas monthly mortgage approvals saw an improvement compared to previous readings. Additionally, Halifax reported that house prices had risen by 1.3% in January, the fourth consecutive increase.

Key economic indicators

In October to December 2023, annual average regular earnings growth for public and private sectors was 5.8% and 6.2%, respectively, according to data compiled by the Office for National Statistics (ONS). Compared to recent periods, wage growth has decelerated but still sits comfortably atop inflation, implying real wage growth.

For the 12 months to December 2023, the Consumer Price Index (CPI) rose 4.0%, up a notch from the 3.9% in November 2023. Core CPI (which excludes energy, food, alcohol and tobacco) rose 5.1%, in line with November 2023.

In Exhibit 2, we show GDP growth, CPI and unemployment forecasts for 2023 collected by HM Treasury and released on a monthly basis. In the January release, estimates for GDP growth in 2023 declined to 0.4%, 0.1pp down from the 0.5% estimates collected in December. Meanwhile, unemployment estimates were in line with December 2023, at 4.3%.

In 2024, GDP growth is forecasted at 0.4%, unchanged from the 2023 estimate (see Exhibit 3). Unemployment expectations have marginally fallen to 4.6%, compared to estimates of 4.7% in December 2023. Q424 inflation estimates have dropped slightly, with expectations now at 2.4%, compared to 2.6% in December 2023.

Exhibit 2: Evolution of UK economic forecasts for 2023

Exhibit 3: Independent forecasts for 2023 and 2024

%

Average

Average of new forecasts

GDP growth

 

2023

0.4

0.4

2024

0.4

0.4

Labour Force Survey unemployment rate Q4

2023

4.3

4.3

2024

4.6

4.7

Inflation Q4 (CPI)

 

2023

4.2

4.2

2024

2.4

2.2

Source: HM Treasury (last reading January 2024)

Source: HM Treasury (January 2024)

Exhibit 2: Evolution of UK economic forecasts for 2023

Source: HM Treasury (last reading January 2024)

Exhibit 3: Independent forecasts for 2023 and 2024

%

Average

Average of new forecasts

GDP growth

 

2023

0.4

0.4

2024

0.4

0.4

Labour Force Survey unemployment rate Q4

2023

4.3

4.3

2024

4.6

4.7

Inflation Q4 (CPI)

 

2023

4.2

4.2

2024

2.4

2.2

Source: HM Treasury (January 2024)

Exhibit 4 illustrates a rising trend in consumer confidence. This indicator represents personal finances and the economic outlook for the next 12 months. The overall index score is made up of five measures: personal finance situation (over the last 12 months), personal finance situation (over the next 12 months), general economic situation (over the last 12 months), general economic situation (over the next 12 months) and the Major Purchase Index.

In February’s release, four of the constituents were down month-on-month, while personal financial situation (over the next 12 months) remained at 0 for a second consecutive month, but well above last year’s score of -18. The overall Consumer Confidence Index dropped two points month-on-month to -21, but improved from last year’s reading of -38. The ascendancy from lows of -49 in September 2022 indicates that Britons are increasingly feeling more positive about the economic outlook. Optimism has been supported by moderating oil prices, decreasing inflation and real wage growth, all coming together to curtail the impact of a higher interest rate environment. We note that the upcoming budget, to be delivered by Chancellor Jeremy Hunt on 6 March, will most likely aim to boost consumer confidence ahead of the forthcoming election.

Unemployment has been falling consecutively by 0.1 points per month since July 2023, from 4.7% to 3.8% in December 2023 (see Exhibit 5). However, redundancies have followed an opposite trend, rising to 116,000 in December 2023 compared to 94,000 in November and 105,000 in July. Redundancies were last this elevated in March 2021 when they reached 149,000. Per 1,000 employees, redundancies rose to four in December 2023 compared to 3.3 in November and 3.7 in July, but remain in line with the five years preceding the pandemic.

Exhibit 4: GfK UK consumer confidence indicator

Exhibit 5: UK redundancies and unemployment

Source: Refinitiv (last value February 2024)

Source: Office for National Statistics (last value December 2023)

Exhibit 4: GfK UK consumer confidence indicator

Source: Refinitiv (last value February 2024)

Exhibit 5: UK redundancies and unemployment

Source: Office for National Statistics (last value December 2023)

Indicators for Advantage motor finance

UK used car transactions grew 5% in 2023 to 7.24m versus 6.89m in 2022 (see Exhibit 6). Greater availability and choice helped volumes as supply constraints experienced in 2022 eased in 2023. December transactions finished strongly at 466,521, the highest since December 2019 (479,106 transactions) and the third highest December transactions figure in data going back to 2014. Although petrol and diesel cars continue to be the most popular vehicle type, used battery electric car transactions improved significantly, increasing 90.9% to 118,973 units, representing a 1.6% market share, up from 0.9% in 2022. Exhibit 7 shows the value of advances and the number of used cars that were purchased on finance. Values and volumes dropped off in December, attributable to seasonal factors. Compared to December 2022, values and volumes both declined 5%. Commenting on the data, Geraldine Kilkelly, director of research and chief economist at the Finance and Leasing Association, said: ‘Consumer spending is expected to remain subdued this year.’ Combined with more industry data (see below), we concur with the view that consumer spending will be subdued and expect vehicle transaction volumes to decline as the impact of higher interest rates continues to sweep through the economy and tighten household budgets.

Exhibit 6: Monthly used car transactions 2020–23

Exhibit 7: Used car finance through dealerships

Source: SMMT (last value December 2023)

Source: Finance and Leasing Association (last value December 2023)

Exhibit 6: Monthly used car transactions 2020–23

Source: SMMT (last value December 2023)

Exhibit 7: Used car finance through dealerships

Source: Finance and Leasing Association (last value December 2023)

Exhibit 8 shows that the descent in used car prices is now pronounced. We can attribute this to the factors describe above – a real interest rate environment that is squeezing household incomes. Exhibit 9 presents a chart on the month-on-month changes in used car prices. In data to December 2023, month-on-month used car prices have reported declines consecutively since June 2023. Seven months of consecutive negative price changes has not been achieved since May 2016 to October 2016. Should January’s reading come out negative, meaning eight months of negative prices changes, one would have to look towards data collected in 2008 to find a similar period of prolonged price declines (month-on-month prices dropped consecutively from May 2008 to January 2009, totalling nine months). A fall in prices may trigger higher loss given defaults, which would then translate into a rise in impairments.

Exhibit 8: Used car price index

Exhibit 9: Monthly change in used car prices

Source: Office for National Statistics CPI Index (last value December 2023)

Source: Office for National Statistics CPI Index. Note: Month-on-month % change. Last value December 2023.

Exhibit 8: Used car price index

Source: Office for National Statistics CPI Index (last value December 2023)

Exhibit 9: Monthly change in used car prices

Source: Office for National Statistics CPI Index. Note: Month-on-month % change. Last value December 2023.

Indicators for Aspen property bridging

Exhibit 10 illustrates both non-residential and residential property transactions (seasonally adjusted figures) in the UK, with the latter more appropriate for Aspen. Non-residential transactions are holding up well. In fact, both year-on-year and month-on-month non-residential transactions increased 3% to 10,030 (provisional estimate), suggesting that investors are still interested in the non-residential market, despite the promoted worry about work-from-home policies that has driven some large corporates to downsize their offices. However, residential transactions fell 2.2% m-o-m and 18% y-o-y to 80,420 (provisional estimate). We attribute the decline to a rising real interest rate environment. A recent decline in two-year fixed rates (see Exhibit 12 below) has encouraged some buying as shown in the marginal increase in mortgage approvals in Exhibit 11. As the gap between interest rates and inflation widens, we would expect overall growth and market activity to be stymied. Although monthly mortgage approvals have recovered slightly since September 2023, levels still remain subdued compared with 2010.

Exhibit 10: UK property transactions

Exhibit 11: Monthly number of mortgage approvals

Source: HM Revenue & Customs. Note: Seasonally adjusted to December 2023.

Source: Bank of England. Note: Seasonally adjusted to December 2023.

Exhibit 10: UK property transactions

Source: HM Revenue & Customs. Note: Seasonally adjusted to December 2023.

Exhibit 11: Monthly number of mortgage approvals

Source: Bank of England. Note: Seasonally adjusted to December 2023.

Exhibit 12 illustrates UK monthly interest rates for two-year fixed mortgages to households with a 75% loan-to-value (LTV). Aspen’s average maximum LTV in H124 was 65%. Although Aspen deals in bridging finance – short-term lending (average of 11 months at H124) to experienced landlords and developers – the data should be somewhat indicative of the environment Aspen is operating in.

Between January 2014 and December 2021, the average two-year fixed mortgage on a 75% LTV was 1.7%. In this period, mortgage holders were beneficiaries of a low interest rate environment. After subsequent Bank of England interest rate rises, the average two-year fixed mortgage rate between January 2022 and December 2023 is now 4.4%. Following the peak of 6.2% in July 2023, rates have now fallen to 5% as the market expects subsequent rate cuts in the latter half of 2024 and onwards into 2025. Although rates are significantly higher relative to recent history, the fall from the peak has provided some relief for incumbent and prospective homeowners as affirmed by the slight uptick in the monthly mortgage approvals shown in Exhibit 11.

Exhibit 12: Interest rate on two-year fixed mortgage to households (LTV of 75%)

Source: Bank of England. Note: Last value December 2023.


Exhibit 13: Financial summary

£'000s

2019

2020

2021

2022

2023

2024e

2025e

Year end 31 January

PROFIT & LOSS

Revenue

 

 

82,970

89,939

83,761

87,889

102,714

113,543

129,074

Impairments

(16,941)

(17,220)

(36,705)

(4,120)

(13,877)

(22,236)

(25,363)

Other cost of sales

(15,751)

(19,872)

(14,264)

(18,771)

(23,676)

(23,214)

(25,561)

Administration expenses

(10,763)

(12,413)

(10,576)

(13,679)

(15,731)

(19,407)

(22,911)

EBITDA

 

 

39,515

40,434

22,216

51,319

49,430

48,686

55,240

Depreciation

 

 

(414)

(450)

(520)

(529)

(525)

(506)

(480)

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

 

 

39,101

39,984

21,696

50,790

48,905

48,180

54,759

Exceptionals

0

0

0

0

0

0

0

Non-recurring items

0

0

0

0

0

0

0

Investment revenues/finance expense

(4,541)

(4,850)

(3,568)

(3,772)

(7,495)

(15,144)

(18,368)

Profit before tax

 

 

34,560

35,134

18,128

47,018

41,410

33,036

36,391

Tax

(6,571)

(6,252)

(3,482)

(9,036)

(7,692)

7,947)

(9,098)

Profit after tax

 

 

27,989

28,882

14,646

37,982

33,718

25,089

27,293

Average Number of Shares Outstanding (m)

12.1

12.1

12.1

12.1

12.1

12.2

12.2

Diluted EPS (p)

 

 

232.0

239.4

120.7

312.7

277.5

206.5

224.6

EPS - basic (p)

 

 

233.2

239.6

120.7

312.8

277.5

206.5

224.6

Dividend per share (p)

118.0

120.0

90.0

126.0

133.0

125.0

125.0

EBITDA margin (%)

47.6%

45.0%

26.5%

58.4%

48.1%

42.9%

42.8%

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

47.1%

44.5%

25.9%

57.8%

47.6%

42.4%

42.4%

Return on equity

17.6%

16.8%

8.1%

19.6%

15.6%

10.9%

11.4%

BALANCE SHEET

Non-current assets

 

 

185,383

197,806

173,413

184,189

222,031

241,449

264,296

Current assets

 

 

95,430

108,275

111,426

143,040

206,143

224,864

214,701

Total assets

 

 

280,813

306,081

284,839

327,229

428,174

466,314

478,997

Current liabilities

 

 

(6,722)

(7,424)

(5,309)

(8,789)

(6,918)

(7,813)

(8,539)

Non-current liabilities (including preference shares)

(108,724)

(119,183)

(98,501)

(111,693)

(196,371)

(224,710)

(224,562)

Net assets

 

 

165,367

179,474

181,029

206,747

224,885

233,791

245,896

NAV per share (p)

1,375

1,493

1,490

1,702

1,852

1,925

2,025

CASH FLOW

Operating cash flow

 

 

10,530

4,946

32,940

(2,094)

(62,760)

(11,318)

(15,803)

Net cash from investing activities

(785)

(265)

(1,112)

(284)

(660)

(323)

(365)

Dividends paid

(13,080)

(14,461)

(13,098)

(12,263)

(15,546)

(16,167)

(15,188)

Other financing (excluding change in borrowing)

14

14

2

1

1

0

0

Net cash flow

 

 

(3,321)

(9,766)

18,732

(14,640)

(78,965)

(27,808)

(31,356)

Opening net (debt)/cash

 

 

(104,990)

(108,311)

(118,077)

(99,345)

(113,985)

(192,950)

(220,758)

Closing net (debt)/cash

 

 

(108,311)

(118,077)

(99,345)

(113,985)

(192,950)

(220,758)

(252,114)

Source: S&U, Edison Investment Research. Note: EPS is on a reported basis.


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Australia

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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.

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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.

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United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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