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GBP19.60
▲ 20.00 (1.03%)
Market capitalisation
GBP239m
Research: Financials
S&U’s year-end trading statement indicated that FY19 results would be in line with expectations. Motor finance new business has slowed recently reflecting a combination of more intense competition and S&U’s maintenance of tighter credit criteria. As a result, FY20 starts with lower receivables than we had assumed, and it also seems prudent to allow for lower growth than previously. Our FY20e EPS is reduced by 4.7% but the prospective ROE remains above 17%.
Written by
S&U |
Lending discipline tempers pace of growth |
Q419 trading update |
Financial services |
7 February 2019 |
Share price performance
Business description
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S&U is a research client of Edison Investment Research Limited |
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S&U’s year-end trading statement indicated that FY19 results would be in line with expectations. Motor finance new business has slowed recently reflecting a combination of more intense competition and S&U’s maintenance of tighter credit criteria. As a result, FY20 starts with lower receivables than we had assumed, and it also seems prudent to allow for lower growth than previously. Our FY20e EPS is reduced by 4.7% but the prospective ROE remains above 17%.
Year end |
Revenue (£m) |
PBT |
EPS |
DPS |
P/E |
Yield |
01/17 |
60.5 |
25.2 |
169.1 |
91.0 |
12.7 |
4.2 |
01/18 |
79.8 |
30.2 |
202.4 |
105.0 |
10.6 |
4.9 |
01/19e |
90.7 |
34.3 |
230.1 |
116.0 |
9.3 |
5.4 |
01/20e |
95.9 |
36.5 |
244.6 |
122.5 |
8.8 |
5.7 |
Note: PBT and EPS are reported.
Broadly in line for FY19
Overall trading was reported as satisfactory and FY19 results are expected to be in line with consensus. The main business, Advantage motor finance, has continued to see a high level of loan applications, but the combination of increased competition and adherence to previously tightened credit criteria has reduced new transactions, and the level of receivables at c £261m was modestly below the £267m reported in the last update on 7 December and our estimate of £268m. Positively, there is evidence that loan quality is improving as underwriting changes start to feed into the loan book. The Aspen property bridging business ended the year with a loan book just above £18m compared with £11.2m at the end of January 2018. The gross margin on new loans has been running ahead of Aspen’s budget. S&U has declared a second interim dividend of 35p (+9.4%), giving a dividend so far for FY18 of 67p versus 60p. The board intends to restore dividend cover to 2x when setting the final payment.
Competition and credit discipline trim FY20e
There is only a marginal reduction in our FY19 estimates reflecting the indicated level of year-end receivables (EPS -0.5%). For FY20, we have assumed a more modest level of motor finance receivables growth (6% versus 10%), noting both upside and downside risk subject to the ebb and flow of competitive pressures, in addition to the macroeconomic background. We still look for the Aspen loan book to expand to £30m.
Valuation: Still implies caution on future returns
Although our estimates are reduced, we still project returns on equity of over 17% for FY19 and FY20 and note that an ROE/COE model suggests the current share price is discounting a return of 13.8% given a cost of equity of 10% and growth of 4% (see further discussion on pages 2–3).
Estimate changes
The key figures from our adjusted segmental forecasts are shown below, with the main changes since our last note in December being the lower assumed levels of receivables for motor finance referred to earlier. Aspen property bridging is in the early stages of its development, having moved out of the pilot stage towards the end of calendar 2018. The year-end loan book was somewhat lower than we had assumed at just over £18.1m versus £20m, but we do not see this as particularly significant given the potentially lumpy incidence of loans which have an average size of c £380,000. As noted earlier, we have kept in place the assumption of a year-end loan book of £30m for FY20. Further details of our forecasts can be found in the financial summary (Exhibit 4).
Exhibit 1: Segmental analysis
£000s |
2016 |
2017 |
2018 |
2019e |
2020e |
Motor |
|||||
Net accounts receivable |
145,141 |
193,529 |
251,215 |
261,347 |
277,263 |
Revenue |
45,182 |
60,521 |
78,882 |
87,878 |
91,275 |
Impairments |
(7,611) |
(12,194) |
(19,434) |
(22,918) |
(22,861) |
Ratios |
|||||
Net receivables growth |
36% |
33% |
30% |
4% |
6% |
Revenue as % average receivables |
35.9% |
35.7% |
35.5% |
34.3% |
33.9% |
P&L loan loss provision as % revenue |
(16.8%) |
(20.1%) |
(24.6%) |
(26.1%) |
(25.0%) |
Risk adjusted yield on average receivables |
29.9% |
28.5% |
26.7% |
25.3% |
25.4% |
P&L loan loss provision as % avg receivables |
(6.1%) |
(7.2%) |
(8.7%) |
(8.8%) |
(8.5%) |
Bridging Finance |
|||||
Net loans end of period |
10,841 |
18,100 |
30,000 |
||
Interest/fee revenue |
899 |
2,825 |
4,660 |
||
Loan loss provision |
(162) |
(237) |
(396) |
||
Ratios |
|||||
Interest/fee revenue % of average receivables |
24.9% |
18.3% |
19.0% |
||
P&L loan loss provision % avg receivables |
(4.5%) |
(1.5%) |
(1.6%) |
||
Group |
|||||
Accounts receivable |
145,141 |
193,529 |
262,056 |
279,447 |
307,263 |
Revenue |
45,182 |
60,521 |
79,781 |
90,703 |
95,934 |
Source: S&U, Edison Investment Research
Exhibit 2 summarises the headline numbers from our estimates. In addition to the P&L items, we have changed our dividend assumptions to align them with earnings and the company’s indication that it will return to a twice-covered dividend for the full year (FY19).
Exhibit 2: Changes to estimates
Revenue (£m) |
PBT (£m) |
EPS (p) |
DPS (p) |
|||||||||
Old |
New |
Change (%) |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
|
2019e |
91.1 |
90.7 |
-0.4% |
34.5 |
34.3 |
-0.5% |
231.4 |
230.1 |
-0.5% |
118.0 |
116.0 |
-1.7% |
2020e |
100.1 |
95.9 |
-4.1% |
38.3 |
36.5 |
-4.7% |
256.6 |
244.6 |
-4.7% |
130.5 |
122.5 |
-6.1% |
Source: Edison Investment Research
Valuation
Our peer comparison table (Exhibit 3) includes a number of companies that are involved in non-standard lending or have motor finance as one of their activities. S&U trades on calendar year 2018 and 2019 P/Es above the averages but within the range of values. It has an above-average yield. The ROE is above the group average, whereas the price-to-book is only slightly higher than average.
While our estimates have been reduced, we still expect the ROE to be above 17% for both FY19 and FY20. Factoring an assumed cost of equity of 10%, long-term growth of 4% and an ROE of 17% into an ROE/COE model would give a value of 2,800p (unchanged). We note that the current share price (2,110p at time of writing) would imply an ROE of 13.8%, all else equal, which is similar to S&U’s recent low point, recorded in FY09.
Exhibit 3: Peer comparison
Price (p) |
Market cap |
P/E 2018 |
P/E 2019 |
Yield |
ROE |
P/BV |
|
S&U |
2,110 |
255 |
9.3 |
8.7 |
5.0 |
16.7 |
1.6 |
1PM |
49 |
43 |
6.2 |
N/A |
1.3 |
13.0 |
0.9 |
Close Brothers |
1,451 |
2,211 |
10.4 |
10.0 |
4.3 |
16.3 |
1.6 |
OneSavings Bank |
373 |
918 |
6.4 |
6.0 |
3.4 |
25.5 |
1.6 |
PCF Group |
37 |
80 |
11.1 |
8.6 |
0.8 |
10.3 |
1.8 |
Provident Financial |
520 |
1,326 |
9.6 |
7.8 |
0.0 |
14.0 |
2.0 |
Secure Trust Bank |
1,395 |
260 |
7.7 |
6.5 |
5.7 |
8.9 |
1.0 |
Peer average |
8.6 |
7.8 |
2.6 |
14.6 |
1.5 |
Source: Refinitiv, Edison Investment Research. Note: P/Es are adjusted to calendar years. Priced at 6 February 2019.
Exhibit 4: Financial summary
£'000s |
2016 |
2017 |
2018 |
2019e |
2020e |
||
Year end 31 January |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
45,182 |
60,521 |
79,781 |
90,703 |
95,934 |
Impairments |
(7,611) |
(12,194) |
(19,596) |
(23,155) |
(23,257) |
||
Other cost of sales |
(8,980) |
(12,871) |
(17,284) |
(17,373) |
(18,515) |
||
Administration expenses |
(7,131) |
(8,332) |
(9,629) |
(11,017) |
(11,512) |
||
EBITDA |
|
|
21,460 |
27,124 |
33,272 |
39,158 |
42,650 |
Depreciation |
|
|
(209) |
(253) |
(294) |
(359) |
(399) |
Op. profit (incl. share-based payouts pre-except.) |
|
|
21,251 |
26,871 |
32,978 |
38,799 |
42,251 |
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Non-recurring items |
0 |
0 |
0 |
0 |
0 |
||
Investment revenues / finance expense |
(1,782) |
(1,668) |
(2,818) |
(4,473) |
(5,769) |
||
Profit before tax (FRS 3) |
|
|
19,469 |
25,203 |
30,160 |
34,326 |
36,482 |
Profit before tax (norm) |
|
|
19,469 |
25,203 |
30,160 |
34,326 |
36,482 |
Tax |
(3,583) |
(4,861) |
(5,746) |
(6,521) |
(6,932) |
||
Discontinued business after tax |
53,299 |
||||||
Profit after tax (FRS 3) |
|
|
69,185 |
20,342 |
24,414 |
27,805 |
29,550 |
Profit after tax (norm) |
|
|
15,886 |
20,342 |
24,414 |
27,805 |
29,550 |
Average Number of Shares Outstanding (m) |
12.0 |
12.0 |
12.1 |
12.1 |
12.1 |
||
Diluted EPS (p) |
|
|
576.5 |
169.1 |
202.4 |
230.1 |
244.6 |
EPS - normalised (p) |
|
|
132.4 |
169.1 |
202.4 |
230.1 |
244.6 |
Dividend per share (p) |
201.0 |
91.0 |
105.0 |
116.0 |
122.5 |
||
EBITDA margin (%) |
47.5% |
44.8% |
41.7% |
43.2% |
44.5% |
||
Operating margin (before GW and except.) (%) |
47.0% |
44.4% |
41.3% |
42.8% |
44.0% |
||
Return on equity |
15.2% |
15.2% |
16.7% |
17.5% |
17.1% |
||
BALANCE SHEET |
|||||||
Non-current assets |
|
|
103,653 |
138,004 |
181,015 |
190,049 |
208,845 |
Current assets |
|
|
61,903 |
57,763 |
84,178 |
113,638 |
141,319 |
Total assets |
|
|
165,556 |
195,767 |
265,193 |
303,686 |
350,165 |
Current liabilities |
|
|
(6,850) |
(17,850) |
(7,927) |
(7,179) |
(7,339) |
Non-current liabilities inc pref |
(30,450) |
(38,450) |
(104,450) |
(131,202) |
(162,086) |
||
Net assets |
|
|
128,256 |
139,467 |
152,816 |
165,305 |
180,740 |
NAV per share (p) |
1,084 |
1,177 |
1,276 |
1,380 |
1,509 |
||
CASH FLOW |
|||||||
Operating cash flow |
|
|
(16,017) |
(27,431) |
(43,418) |
8,115 |
2,478 |
Net cash from investing activities |
80,716 |
(308) |
(1,040) |
(588) |
(588) |
||
Dividends paid |
(23,090) |
(9,548) |
(11,377) |
(13,084) |
(14,336) |
||
Other financing (excluding change in borrowing) |
55 |
21 |
12 |
(3) |
(16) |
||
Net cash flow |
|
|
41,664 |
(37,266) |
(55,823) |
(5,559) |
(12,462) |
Opening net (debt)/cash |
|
|
(53,565) |
(11,901) |
(49,167) |
(104,990) |
(110,549) |
Closing net (debt)/cash |
|
|
(11,901) |
(49,167) |
(104,990) |
(110,549) |
(123,011) |
Source: S&U accounts, Edison Investment Research. Note: FY16 dividend per share includes exceptional payment of 125p.
|
|
Research: Industrials
Consistent messaging from the Epwin management team continued with a year-end update that confirmed that FY18 trading had been in line with market expectations. The theme of self-help given market headwinds is ongoing with tangible evidence of actions taken and planned. Market backdrop uncertainty is reflected in Epwin’s rating multiples. A dividend yield approaching 7% (c 1.9x covered) should be of interest to investors.