S&U — Positive trading update

S&U (LSE: SUS)

Currency in GBP

Last close As at 26/01/2023

GBP21.00

20.00 (0.96%)

Market capitalisation

GBP253m

Research: Financials

S&U — Positive trading update

Lending growth in the August to December period has been ahead of our expectation, while credit quality in both motor finance and property bridging remains strong. S&U is sensitive to the macroeconomic background and continues to adjust its lending criteria accordingly to protect customers and credit performance. This provides a sound basis for further sustainable growth.

Andrew Mitchell

Written by

Andrew Mitchell

Director, Financials

Financials

S&U

Positive trading update

Q323 trading update

Financial services

12 December 2022

Price

2,125p

Market cap

£258m

Borrowings (£m) at 8 Dec 2022

Just over 180

Shares in issue

12.2m

Free float

27%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.5)

0.7

(21.3)

Rel (local)

(2.7)

(0.4)

(19.8)

52-week high/low

2,830p

1,905p

Business description

S&U’s Advantage motor finance business lends on a simple hire-purchase basis to lower- and middle-income groups that may have impaired credit records that restrict their access to mainstream products. It has c 64,500 customers. The Aspen property bridging business has been developing, following its launch in early 2017.

Next events

Q423 trading update

10 February 2023

FY23 results

28 March 2023

Analysts

Andrew Mitchell

+44 (0)20 3077 5700

Martyn King

+44 (0)20 3077 5700

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

Lending growth in the August to December period has been ahead of our expectation, while credit quality in both motor finance and property bridging remains strong. S&U is sensitive to the macroeconomic background and continues to adjust its lending criteria accordingly to protect customers and credit performance. This provides a sound basis for further sustainable 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

17.6

4.2

01/22

87.9

47.0

312.7

126.0

6.8

5.9

01/23e

102.6

41.2

276.2

132.0

7.7

6.2

01/24e

121.0

42.5

265.6

133.0

8.0

6.3

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

Trading well despite macroeconomic clouds

S&U’s update for the period from August to December (year-end 31 January) reported total net receivables of c £404m compared with £370m at the end of July. Advantage motor finance receivables increased by about 6%. Credit quality there remains strong with collections at 93.7% of due and the actual number of bad debts and voluntary terminations below budget. S&U expects Advantage profits to be in line with expectations because higher revenue is being offset by higher funding, customer servicing, collection and staff retention costs. Aspen property bridging net receivables increased by c 20%. It is seeing longer periods for refinancing and legal processes but the extended-beyond-term list is small and it has only seven technically defaulted accounts. Aspen profits are at a record level.

Outlook and estimates

S&U acknowledges the pressures inflation, a slowing economy and a cooling in the housing market may place on its customers. It therefore continues to calibrate its lending criteria in line with this even though it believes pessimism over the outlook may be overstated. We have changed our estimates to reflect the higher-than-expected growth in receivables and costs reported. Estimated earnings per share for FY23 increase by 1%, while reintroduction of the 25% corporation tax rate means a 5% reduction for FY24.

Valuation

S&U shares trade on prospective P/E ratios of c 8x for this year and next with a prospective yield of over 6%. The difficult economic background has resulted in share price weakness (down 21% ytd) but its resilient trading has helped it outperform some specialist lending peers. The current price to book multiple (1.2x) compares with a 10-year average of 1.8x and the implied 11.7% return on equity (ROE) is below prospective and historical levels.

Background and outlook

In this section we update the charts we use to provide background indicators for Advantage and Aspen.

The recent trend for 2023 GDP forecasts to fall and inflation and unemployment forecasts to rise has continued in recent months, so in Exhibit 1 we show a HM Treasury-collected compilation of new medium forecasts to give a longer-term perspective. This shows the expected relatively shallow recession in 2023 with inflation still high but then falling below 3%. Unemployment rises but then is seen as being stable at 4.1–4.3%. If the unemployment forecasts prove broadly accurate, this would be a return to the level that prevailed for some years prior to the pandemic.

Exhibit 1: Comparison of independent economic forecasts for the UK (November)

%

2022

2023

2024

2025

2026

GDP growth

4.2

-0.7

1.4

2.0

1.8

CPI*

9.0

7.4

3.2

2.6

2.7

Labour Force Survey unemployment*

3.7

4.2

4.3

4.1

4.2

Source: HM Treasury. Note: Average of eight new forecasts. *Annual average.

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. Confidence was sapped further recently as inflation hit harder and interest rates rose. The latest reading shows a minor uptick, perhaps signalling a flattening of the curve, but pressures on consumers, including Advantage customers, remain elevated. S&U has previously noted in mitigation that wages are likely to adjust and that its customers tend to depend on their vehicles for transport to work. Advantage continues to make adjustments for the rise in inflation within its affordability calculations and to fine-tune its credit criteria.

Exhibit 2: GfK UK consumer confidence indicator

Exhibit 3: UK redundancies and unemployment

Source: Refinitiv (last value November 2022)

Source: ONS (last value September 2022)

Exhibit 2: GfK UK consumer confidence indicator

Source: Refinitiv (last value November 2022)

Exhibit 3: UK redundancies and unemployment

Source: ONS (last value September 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 still below pre-pandemic levels even though there has been a small increase in the rate for the last four monthly readings.

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 feature in 2022 and the monthly rate of transactions has stayed below the 2019 levels. Exhibit 5 shows a similar pattern in used car finance, with seasonal dips evident in addition to lockdown impacts. The chart shows a recent flattening out in volume and value, still at a relatively high level.

Exhibit 4: Monthly used car transactions 2019–22

Exhibit 5: Used car finance through dealerships

Source: SMMT (last value September 2022)

Source: Finance and Leasing Association (last value Sept. 2022)

Exhibit 4: Monthly used car transactions 2019–22

Source: SMMT (last value September 2022)

Exhibit 5: Used car finance through dealerships

Source: Finance and Leasing Association (last value Sept. 2022)

Used car prices (see Exhibit 6) experienced a very sharp increase from mid-2021, with strong consumer demand and reduced supply pushing prices up. From February this year, the index showed small month-on-month decreases (see Exhibit 7), suggesting a slight softening of demand and/or easing of supply constraints. However, this is not clear from the fluctuations seen in more recent months and prices remain at an historically high level. At the margin, an eventual 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 October 2022)

Source: ONS CPI index, m-o-m % change

Exhibit 6: Second-hand car price index

Source: ONS CPI index (last value October 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. This is also evident in the number of mortgage approvals (Exhibit 9). The transaction data does not yet capture any slowdown but mortgage approvals, while at a similar level to pre-pandemic years, are on a downward trend. In line with anecdotal reports and modest weakening in some house price measures, Aspen itself has reported a slight slowing in the residential market. On a longer view, S&U continues to see 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 offers a bespoke service and has scope for significant but measured expansion now that it is more established in the market.

Exhibit 8: UK property transactions

Exhibit 9: Monthly number of mortgage approvals

Source: HM Revenue & Customs. Seasonally adjusted – to Oct 22

Source: Bank of England. Seasonally adjusted

Exhibit 8: UK property transactions

Source: HM Revenue & Customs. Seasonally adjusted – to Oct 22

Exhibit 9: Monthly number of mortgage approvals

Source: Bank of England. Seasonally adjusted

Estimate changes and funding

We have adjusted our estimates to allow for the level of receivables reported in the trading update and now look for total net receivables of £413m and £445m at end FY23 and FY24, respectively (previously £394m and £429m). We have allowed for increased customer servicing and collection costs at Advantage. We had already assumed an increase in funding costs and note that this is not expected to be offset in the near term at Advantage but that Aspen can adjust its rate cards more immediately thereby protecting its margin. This may affect the rate of lending growth, but for the moment the appetite in the bespoke high-quality sector Aspen addresses remains strong. As mentioned earlier, the 5% reduction in FY24 EPS reflects the reintroduction of a 25% corporation tax rate. Exhibit 10 gives a summary of the changes in headline numbers from our estimates and further detail can be seen in the financial summary table, Exhibit 11.

Exhibit 10: 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 (%)

FY23e

101.6

102.6

0.9

40.9

41.2

0.8

274.1

276.2

0.8

132.0

132.0

0.0

FY24e

117.3

121.0

3.1

41.9

42.5

1.5

279.3

265.6

(4.9)

133.0

133.0

0.0

Source: Edison Investment Research

The growth in lending means that group borrowings have increased to just above £180m and group borrowing facilities have been increased by £30m to £210m. On our estimates, net debt/equity would be 83% at end FY23 and FY24.

Valuation

The shares trade on prospective P/E multiples of 7.7x and 8.0x for this year and next. The prospective yield is 6.2%. We frame valuation using our ROE/COE calculations. If we assume a cost of equity (COE) of 10% and long-term growth of 2%, then the share price at the time of writing (2125p) would be consistent with an ROE of 11.7%, clearly below our estimates for FY23 (15.6%) and FY24 (13.9%). For the five-year period FY18–22, which includes both pre- and post-pandemic results, the average ROE was 15.8%, indicating that the share price builds in a substantial allowance for the sombre macroeconomic background.

Exhibit 11: 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

102,587

121,014

Impairments

(19,596)

(16,941)

(17,220)

(36,705)

(4,120)

(15,305)

(21,697)

Other cost of sales

(17,284)

(15,751)

(19,872)

(14,264)

(18,771)

(22,904)

(24,253)

Administration expenses

(9,629)

(10,763)

(12,413)

(10,576)

(13,679)

(15,153)

(16,942)

EBITDA

 

 

33,272

39,515

40,434

22,216

51,319

49,224

58,122

Depreciation

 

 

(294)

(414)

(450)

(520)

(529)

(496)

(458)

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

 

 

32,978

39,101

39,984

21,696

50,790

48,729

57,664

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)

(7,515)

(15,172)

Profit before tax

 

 

30,160

34,560

35,134

18,128

47,018

41,214

42,492

Tax

(5,746)

(6,571)

(6,252)

(3,482)

(9,036)

(7,663)

(10,233)

Profit after tax

 

 

24,414

27,989

28,882

14,646

37,982

33,551

32,259

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

276.2

265.6

EPS - basic (p)

 

 

203.8

233.2

239.6

120.7

312.8

276.2

265.6

Dividend per share (p)

105.0

118.0

120.0

90.0

126.0

132.0

133.0

EBITDA margin (%)

41.7%

47.6%

45.0%

26.5%

58.4%

48.0%

48.0%

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

41.3%

47.1%

44.5%

25.9%

57.8%

47.5%

47.7%

Return on equity

16.7%

17.6%

16.8%

8.1%

19.6%

15.6%

13.9%

BALANCE SHEET

Non-current assets

 

 

181,015

185,383

197,806

173,413

184,189

223,424

240,668

Current assets

 

 

84,178

95,430

108,275

111,426

143,040

194,569

209,209

Total assets

 

 

265,193

280,813

306,081

284,839

327,229

417,993

449,877

Current liabilities

 

 

(7,927)

(6,722)

(7,424)

(5,309)

(8,789)

(6,745)

(7,459)

Non current liabilities inc pref

(104,450)

(108,724)

(119,183)

(98,501)

(111,693)

(186,521)

(201,333)

Net assets

 

 

152,816

165,367

179,474

181,029

206,747

224,728

241,085

NAV per share (p)

1,276

1,375

1,493

1,490

1,704

1,852

1,987

CASH FLOW

Operating cash flow

 

 

(43,418)

10,530

4,946

32,940

(2,094)

(55,546)

681

Net cash from investing activities

(1,040)

(785)

(265)

(1,112)

(284)

(369)

(310)

Dividends paid

(11,377)

(13,080)

(14,461)

(13,098)

(12,263)

(15,556)

(15,913)

Other financing (excluding change in borrowing)

12

14

14

2

1

2

0

Net cash flow

 

 

(55,823)

(3,321)

(9,766)

18,732

(14,640)

(71,469)

(15,542)

Opening net (debt)/cash

 

 

(49,167)

(104,990)

(108,311)

(118,077)

(99,345)

(113,985)

(185,454)

Closing net (debt)/cash

 

 

(104,990)

(108,311)

(118,077)

(99,345)

(113,985)

(185,454)

(200,996)

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


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).

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New Zealand

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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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Research: Industrials

Severfield — Constructing a robust future at a low rating

The strong interims confirmed Severfield’s robust performance in the current inflationary environment. The company is benefiting from solid demand across a range of sectors, which is reflected in the elevated UK order book (£464m versus the 2016–21 average of £266m). In India, the joint venture (JV) is growing rapidly and capacity is to be expanded to cater for additional demand. We believe the quality of the business and the anticipated growth is not reflected in the FY23e P/E rating of c 7.5x, which is comfortably below the long-term average of 10.4x.

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