Currency in GBP
Last close As at 26/01/2023
GBP21.00
▲ 20.00 (0.96%)
Market capitalisation
GBP253m
Research: Financials
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.
S&U |
Positive trading update |
Q323 trading update |
Financial services |
12 December 2022 |
Share price performance
Business description
Next events
Analysts
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* |
EPS* |
DPS |
P/E |
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 |
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.
|
|
Research: Industrials
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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