S&U — Maintaining cautious approach

S&U (LSE: SUS)

Last close As at 26/02/2024

GBP18.30

−10.00 (−0.54%)

Market capitalisation

GBP224m

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Research: Financials

S&U — Maintaining cautious approach

In its update for the August to December period, S&U posted good growth in its net receivables balances in both Advantage and Aspen. Advantage reported a drop in live collections to 91% (H123: 94%), but bad debts and voluntary terminations remain below budget. Aspen continues to experience good volume with transactions improving in the quarter, while repayments remain above budget. Additionally, group borrowings reached £209m as S&U continues to fund its growth initiatives. Management announced that following a review by the Financial Conduct Authority (FCA), it has appointed a Skilled Person to help further align Advantage Finance’s processes with the FCA’s standards including the new Consumer Duty requirements.

Written by

Robert Murphy

Managing Director, Financials and Investment Trusts

Financials

S&U

Maintaining cautious approach

Trading update

Financial services

18 December 2023

Price

2,100p

Market cap

£255m

Net debt (£m) at 11 December 2023

209

Shares in issue

12.2m

Free float

16.9%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.8)

(2.3)

(0.5)

Rel (local)

(7.2)

(1.2)

(2.4)

52-week high/low

2,570p

2,060p

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 c 65,000 customers. The Aspen property bridging business has been developing since its launch in 2017.

Next events

Q424 trading update

8 February 2024

FY24 results

9 April 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 update for the August to December period, S&U posted good growth in its net receivables balances in both Advantage and Aspen. Advantage reported a drop in live collections to 91% (H123: 94%), but bad debts and voluntary terminations remain below budget. Aspen continues to experience good volume with transactions improving in the quarter, while repayments remain above budget. Additionally, group borrowings reached £209m as S&U continues to fund its growth initiatives. Management announced that following a review by the Financial Conduct Authority (FCA), it has appointed a Skilled Person to help further align Advantage Finance’s processes with the FCA’s standards including the new Consumer Duty requirements.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/22

87.9

47.0

312.7

126.0

6.7

6.0

01/23

102.7

41.4

277.5

133.0

7.6

6.3

01/24e

114.2

37.5

234.8

133.0

8.9

6.3

01/25e

132.5

39.4

242.9

150.0

8.6

7.1

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

Positive momentum in both Advantage and Aspen

In Advantage, net receivables are up 11% y-o-y to £327m. Transactions improved in the period, especially with the more prime customers who count for 45% of new business. However, live collection rates fell to 91% (H124: 94%) as household budgets remain under pressure. Positively, bad debts and voluntary terminations remained below budget. In Aspen, net receivables grew 9% y-o-y to £119m. Collections remain strong while loans in technical default edged up to 16 from 15 in H123. Repayments are strong and 20% above budget. Management also highlighted that the pipeline in Aspen was strong with new business at record levels and 30% above budget.

Lower PBT on higher impairments and finance costs

We have raised our net receivables assumption for FY24 and FY25 by 7% and 10% to £461m and £496m to factor in the growth experienced by both Advantage and Aspen. Due to lower live collections and worsening macroeconomic data, we have increased our impairment estimates for Advantage by 17% and 23% in FY24 and FY25, respectively. Additionally, we have increased our finance cost assumptions by 5% and 26% in FY24 and FY25, anticipating that S&U will continue to fund growth with borrowing. As a result, our profit before tax (PBT) estimates for FY24 and FY25 decreased by 8% and 11% to £37.5m and £39.4m respectively.

Valuation: Implied 20% uplift from current price

Using a return on equity/cost of equity (ROE/COE) model with an ROE of 12.3%, COE of 10% and growth rate of 2%, the implied share price for S&U is 2,515p. This suggests a potential 20% uplift. At its current share price, the market is pricing in an ROE of 10.6%; below the FY16–23 average of 16% and below our estimates of 12.3% and 12.1% for FY24 and FY25 respectively.

Estimate changes

S&U continues to experience good volume in both Advantage and Aspen. In Advantage, we have increased our net receivables estimates for FY24 to £330m (previously £325m) and £337m in FY25 (previously £334m). In Aspen, we have increased our net receivables assumption to £131m and £160m in FY24 and FY25 respectively, compared to our old estimates of £105m and £115m. As a result, our revenue assumption for FY24 and FY25 has risen by 1% and 7% to £114m and £133m, respectively.

In Advantage Finance, live collections dropped to 91% in the period, compared to 94% in H123. With used car prices falling and unemployment on the rise, we have increased our impairment assumption to £17.8m and £22.8m in FY24 and FY25, respectively, from £15.2m and £18.6m. However, we do highlight that Advantage Finance has an aggressive provision policy – ‘all loans 1 month or more in contractual arrears are deemed credit impaired and therefore included in IFRS9 stage 3.’ In Aspen, our impairment assumption has also increased in line with net receivables growth. Our impairment forecast has risen to £1.1m and £1.9m from £1m and £1.5m in FY24 and FY25, respectively.

Management stated that its relationship with the FCA has become more ‘formal’ following an examination of S&U’s ‘collecting processes, procedures and policies’. As appropriate, and alongside other lenders in its industry, S&U has appointed a Skilled Person who will communicate with the FCA and work to implement the FCA’s standards into the business. There has been no indication of a timeline on how long the process will endure but we draw confidence from Advantage’s strong record with the Financial Ombudsman Service, which S&U will operate swiftly to align its processes with the requirements of the FCA. S&U has an uphold rate of 15%, the best in the motor finance industry. The uphold rate refers to the percentage of complaints that were found to be in favour of the customer. Accounting for this process, we have marginally lifted our administrative cost assumption for both FY24 and FY25.

We have increased our finance cost assumption by 5% and 26% in FY24 and FY25 respectively as we anticipate that S&U will continue to fund growth with borrowing. In the trading statement, the group highlighted that its borrowing increased from £183m in H124 to £209m as of 11 December. It has total committed facilities of £280m. Hence, combined with the increase in impairments and administrative cost assumptions, our PBT forecasts for FY24 and FY25 have fallen by 8% and 11% to £37.5m and £39.4m, respectively. Consequently, our EPS figure has fallen by the same proportions for FY24 and FY25. Our dividend per share estimates are unchanged.

Exhibit 1: Changes to estimates

Year end 31 January

FY24e

FY25e

(£m except where stated)

Old

New

Change

Old

New

Change

Revenue

112.8

114.2

1%

124.3

132.5

7%

EBITDA

55.1

52.5

(5%)

59.2

58.3

(1%)

PBT

40.9

37.5

(8%)

44.1

39.4

(11%)

EPS (p)

256.2

234.8

(8%)

272.0

242.9

(11%)

DPS (p)

133.0

133.0

0%

150.0

150.0

0%

Source: Edison Investment Research


Macroeconomic background

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

To summarise, GDP growth and inflation expectations for 2023 have edged upwards to 0.5% and 4.6%, while unemployment assumptions remain at 4.4%. Consumer confidence improved from October’s data as headline inflation continues to fall and the British public’s assumptions on inflation in the next 12 months has improved from previous estimates. UK used car transactions remain robust and while prices are beginning to falter, they remain at elevated levels. UK non-residential transactions remain strong whereas UK residential transactions continue to decline. Meanwhile, UK mortgage approvals continue to hover at subdued levels not seen since 2010.

Management acknowledges the unfavourable macroeconomic environment but remains confident in the group’s historical performance and experience to emerge from this economic trough stronger than before.

Key economic indicators

Headline inflation for October 2023 was 4.6%, down from 6.3% in September. Lower inflation was driven by cooling prices in housing and household services alongside food and non-alcoholic beverages. Core inflation was 5.7%, down from 6.1% in September. Annual wage growth continued to grow but at a slower pace compared to recent figures. Excluding bonuses, annual wages grew 7.3% while including bonuses, pay increased by 7.2%. With inflation at 4.6% (according to the most recent data release relating to October), the average wage increase implies real wage growth for employees which should also support credit quality. Between August and October 2023, average regular pay growth for the public sector was 6.9%, marking one of the highest annual growth rates since record keeping commenced in 2001. Meanwhile, private wage growth was 7.3% in the same period.

In Exhibit 2, we show GDP growth, CPI and unemployment forecasts for 2023 collected by HM Treasury and released on a monthly basis. Analysing HM Treasury’s November release, we find that, compared to October’s release, both GDP growth and inflation estimates for 2023 have ticked up by 0.1pp to 0.5% and 4.6% respectively, while unemployment rate expectations are left unchanged at 4.4%. Average forecasts for GDP growth, unemployment and inflation are now 0.5%, 4.3% and 4.6% respectively versus the average forecasts of 0.5%, 4.4% and 4.5% released in October (see Exhibit 3).

The 2024 forecasts collected in November remain broadly in line with the October assumptions (see Exhibit 3). GDP growth expectations remained unchanged whilst unemployment rate expectations increased 0.1pp to 4.7% and inflation expectations rose 0.2pp to 2.7%. In the forthcoming data release, we anticipate a downward revision in 2024 GDP forecasts as recent GDP data revealed that the UK economy shrank by 0.3% between September and October.

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

0.5

0.5

2024

0.5

0.4

Labour Force Survey unemployment rate Q4

2023

4.4

4.3

2024

4.7

4.6

Inflation Q4 (CPI)

 

2023

4.6

4.6

2024

2.7

2.5

Source: Collected by HM Treasury (last reading November 2023).

Source: Collected by HM Treasury (November 2023).

Exhibit 2: Evolution of UK economic forecasts for 2023

Source: Collected by HM Treasury (last reading November 2023).

Exhibit 3: Independent forecasts for 2023 and 2024

%

Average

Average of new forecasts

GDP growth

 

2023

0.5

0.5

2024

0.5

0.4

Labour Force Survey unemployment rate Q4

2023

4.4

4.3

2024

4.7

4.6

Inflation Q4 (CPI)

 

2023

4.6

4.6

2024

2.7

2.5

Source: Collected by HM Treasury (November 2023).

Exhibit 4 shows the consumer confidence indicator of personal finances and the economic outlook between now and 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. All five measures improved from the October data. Positive sentiment can be attributed to falling inflation and real wage growth in both the private and public sector. Falling oil prices have also been a tailwind to the more positive outlook. Supporting this view, a Bank of England (BoE) survey found that average expectations among the British public for the rate of inflation over the next 12 months fell to 3.3% in November, down from 3.6% in August. However, we do note that over the past few months sentiment seems to be range-bound, which suggests that consumers remain uncertain about the outlook.

Unemployment continues to climb gradually as we move into a higher real interest rate environment (see Exhibit 5). Unemployment rose 0.1pp m-o-m and 0.5pp y-o-y. Redundancies followed a similar trend, with 102,000 people made redundant based on data for July. This was lower than the 108,000 reported in the previous month but 59% higher year-on-year. Per 1,000 employees, redundancies were 3.6, up from 2.3 in 2022. We expect this trend to prevail as the BoE works towards its inflation target.

Exhibit 4: GfK UK consumer confidence indicator

Exhibit 5: UK redundancies and unemployment

Source: Refinitiv (last value November 2023)

Source: ONS (last value July 2023)

Exhibit 4: GfK UK consumer confidence indicator

Source: Refinitiv (last value November 2023)

Exhibit 5: UK redundancies and unemployment

Source: ONS (last value July 2023)

Indicators for Advantage motor finance

Exhibit 6 illustrates the value of advances and number of used cars that were purchased on finance through dealerships. In data stretching to October 2023, on a year-on-year basis, the value of used cars dropped 5% to £1,831 accompanied by a 4% drop in the volume of cars to 123,390. Despite the decrease in both value and volume, compared to previous years the figures remain elevated even in the face of an unfavourable economic outlook.

Exhibit 7 shows the number of monthly used car transactions in the UK between 2020 and 2023. In September, monthly volumes dropped 7% month-on-month, which can be attributed to seasonal factors as declines in September are apparent in all the preceding years to 2014. However, we note that in the last four years the 7% fall is the second largest decrease, beaten by a decline of 8% in 2022. We do highlight that month-on-month transactions in 2023 year to date have been consistently above those in 2022. In the nine months to September, average monthly transactions were 618,175, ranking third lowest (2022: 591,054; 2020: 562,202) out of data compiled from 2014. With rate rises slowly having its effect on the economy, we could see further suppressed monthly transactions – in addition to the usual seasonal slowdown – as consumers opt out from purchasing cars.

Exhibit 6: Used car finance through dealerships

Exhibit 7: Monthly used car transactions 2020–23

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

Source: SMMT (last value September 2023)

Exhibit 6: Used car finance through dealerships

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

Exhibit 7: Monthly used car transactions 2020–23

Source: SMMT (last value September 2023)

Exhibits 8 and 9 show that used car prices are headed downwards. According to data collected by the Office for National Statistics (ONS) to October 2023, the used car price index fell 3% m-o-m and 4% y-o-y (see Exhibit 8). At a value of 115, the index has fallen below its previous resistance of c 120 which, coupled with the subdued economic outlook, could serve as an indicator that used car prices are headed further down in the short term. Exhibit 9 shows the month-on-month changes in the price of used cars. Since June 2023, ONS has recorded consecutive negative month-on-month price changes in the values of used vehicles, on a par with the consecutive negative moves seen between February 2022 and June 2022.

Exhibit 8: Used car price index

Exhibit 9: Monthly change in used car prices

Source: ONS CPI Index (last value October 2023)

Source: ONS CPI Index. Note: Month-on-month % change.

Exhibit 8: Used car price index

Source: ONS CPI Index (last value October 2023)

Exhibit 9: Monthly change in used car prices

Source: ONS CPI Index. Note: Month-on-month % change.

Indicators for Aspen property bridging

Exhibit 10 illustrates both non-residential and residential transactions (seasonally adjusted figures) in the UK, with the latter more appropriate for Aspen. Compared to residential transactions, non-residential transactions are holding up well. Year-on-year, non-residential transactions stayed relatively flat but increased 3% m-o-m to 9,930 (provisional estimate). However, residential transactions fell 21% y-o-y and 3% m-o-m to 82,910 (provisional estimate). This effect is highlighted in Exhibit 11 where data from the BoE shows that monthly mortgage approvals have stumbled to levels not seen since 2010. As interest rates have climbed steeply, lenders have subsequently passed on rates to consumers while simultaneously tightening credit standards, making it harder for first time buyers to get onto the property ladder.

Exhibit 10: UK property transactions

Exhibit 11: Monthly number of mortgage approvals

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

Source: BoE. Note: Seasonally adjusted to October 2023.

Exhibit 10: UK property transactions

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

Exhibit 11: Monthly number of mortgage approvals

Source: BoE. Note: Seasonally adjusted to October 2023.

The pressure of higher rates is beginning to surface. Mortgage data published by the BoE on 12 December revealed that arrears, as a proportion of total loan balances, increased quarter-on-quarter to 1.17% from 1.02%, the highest since Q217 (see Exhibit 12). Although historically the figure is still low, the uptick highlights the burden that higher rates and inflation are placing on households and the increasing difficulty to meet mortgage payments.

Aspen’s business model of providing property bridging financing to sophisticated landlords and developers may partly mitigate the issue of rising arrears. On the one hand, due to its short-term lending structure, Aspen can respond promptly to market changes and adjust its lending criteria to suit prevailing market conditions. However, it can also be argued that since the loan terms are short (11-month average term in H123), developers will also need to find buyers in the short term. If they are unable to achieve this, Aspen may experience some difficulties with its clients’ ability to repay loans. Thus far, however, Aspen has stated that in the past four months repayments have been 20% above budget and it continues to experience strong momentum in the business, with the pipeline of new business at a record level and 30% above budget. We note that collections remain robust and the number of loans in technical default is 16, compared to 15 in H123.

Exhibit 12: UK mortgages in arrears

Source: BoE (last value September 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

114,151

132,525

Impairments

(16,941)

(17,220)

(36,705)

(4,120)

(13,877)

(18,876)

(24,735)

Other cost of sales

(15,751)

(19,872)

(14,264)

(18,771)

(23,676)

(23,649)

(26,920)

Administration expenses

(10,763)

(12,413)

(10,576)

(13,679)

(15,731)

(19,161)

(22,529)

EBITDA

 

 

39,515

40,434

22,216

51,319

49,430

52,464

58,340

Depreciation

 

 

(414)

(450)

(520)

(529)

(525)

(505)

(478)

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

 

 

39,101

39,984

21,696

50,790

48,905

51,959

57,862

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)

(14,411)

(18,503)

Profit before tax

 

 

34,560

35,134

18,128

47,018

41,410

37,548

39,359

Tax

(6,571)

(6,252)

(3,482)

(9,036)

(7,692)

(9,012)

(9,840)

Profit after tax

 

 

27,989

28,882

14,646

37,982

33,718

28,536

29,519

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

234.8

242.9

EPS - basic (p)

 

 

233.2

239.6

120.7

312.8

277.5

234.8

242.9

Dividend per share (p)

118.0

120.0

90.0

126.0

133.0

133.0

150.0

EBITDA margin (%)

47.6%

45.0%

26.5%

58.4%

48.1%

46.0%

44.0%

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

47.1%

44.5%

25.9%

57.8%

47.6%

45.5%

43.7%

Return on equity

17.6%

16.8%

8.1%

19.6%

15.6%

12.3%

12.1%

BALANCE SHEET

Non-current assets

 

 

185,383

197,806

173,413

184,189

222,031

242,705

261,184

Current assets

 

 

95,430

108,275

111,426

143,040

206,143

226,103

258,531

Total assets

 

 

280,813

306,081

284,839

327,229

428,174

468,808

519,715

Current liabilities

 

 

(6,722)

(7,424)

(5,309)

(8,789)

(6,918)

(7,867)

(8,684)

Non-current liabilities (including preference shares)

(108,724)

(119,183)

(98,501)

(111,693)

(196,371)

(223,710)

(260,562)

Net assets

 

 

165,367

179,474

181,029

206,747

224,885

237,232

250,469

NAV per share (p)

1,375

1,493

1,490

1,702

1,852

1,953

2,062

CASH FLOW

Operating cash flow

 

 

10,530

4,946

32,940

(2,094)

(62,760)

(10,262)

(5,178)

Net cash from investing activities

(785)

(265)

(1,112)

(284)

(660)

(320)

(344)

Dividends paid

(13,080)

(14,461)

(13,098)

(12,263)

(15,546)

(16,167)

(16,282)

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)

(26,748)

(21,804)

Opening net (debt)/cash

 

 

(104,990)

(108,311)

(118,077)

(99,345)

(113,985)

(192,950)

(219,698)

Closing net (debt)/cash

 

 

(108,311)

(118,077)

(99,345)

(113,985)

(192,950)

(219,698)

(241,502)

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

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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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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