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Currency in GBP
Last close As at 30/03/2023
GBP23.25
▲ −25.00 (−1.06%)
Market capitalisation
GBP273m
Research: Financials
S&U has started its current financial year well with Advantage motor finance and Aspen property bridging making steady progress and achieving profit ahead of budget in the period since the end of January. Credit quality remains strong and while the group acknowledges rising cost of living pressures and reduced consumer confidence, it notes that it is currently on track and has funding in place (£180m facility) to meet its growth targets for FY23. Our estimates are unchanged.
S&U |
Positive update despite macro uncertainties |
AGM trading update |
Financial services |
30 May 2022 |
Share price performance
Business description
Next events
Analysts
S&U is a research client of Edison Investment Research Limited |
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S&U has started its current financial year well with Advantage motor finance and Aspen property bridging making steady progress and achieving profit ahead of budget in the period since the end of January. Credit quality remains strong and while the group acknowledges rising cost of living pressures and reduced consumer confidence, it notes that it is currently on track and has funding in place (£180m facility) to meet its growth targets for FY23. Our estimates are unchanged.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
01/21 |
83.8 |
18.1 |
120.7 |
90.0 |
19.9 |
3.8 |
01/22 |
87.9 |
47.0 |
312.7 |
126.0 |
7.7 |
5.3 |
01/23e |
95.6 |
39.3 |
262.0 |
130.0 |
9.2 |
5.4 |
01/24e |
105.8 |
42.7 |
267.0 |
133.0 |
9.0 |
5.5 |
Note: *PBT and EPS are reported. EPS are diluted.
Advantage motor finance
Advantage has seen sales volumes growing steadily despite supply constraints in the used car market. Industry data show calendar Q122 used car finance transactions up 25% from Q121 but down slightly from the pre-pandemic period in Q119 (see Exhibit 5). Advantage net receivables on 25 May stood at £268m compared with £259m at the end of FY22 and £243m on 19 May last year. Payment arrears are below budget and have been falling, while collections are strong at 93.7% of due. A prudent approach to underwriting is taken given the potential pressure on customer finances as inflation rises. Affordability calculations include a buffer to reflect this and credit criteria are continually reviewed.
Aspen property bridging
Aspen has also made steady progress, with 25 May net receivables standing at £72m compared with £64m for end FY22 and £52m for 19 May 2021. Last year benefited from the provision of loans under the Coronavirus Business Interruption Loans Scheme, which will have now been largely repaid. Overall repayment quality remains good. Aspen reports a good start for its new bridge-to-let product, which made a modest contribution in the period. The shortage of housing supply creates a favourable long-term backdrop for the business, which should also benefit as it strengthens its reputation in the market. To support growth the business has undertaken further recruitment.
Estimates and valuation
While the level of group receivables might, all else being equal, point to an upgrade in estimates, we leave them unchanged at this stage given the effect of cost-of-living increases has yet to become evident. Mitigating any impact from a worsening background should be the forward-looking nature of provisioning required under accounting standards and S&U’s work on credit criteria and customer service. S&U shares trade on a prospective P/E of 9.2x and a historical yield of 5.3%. An ROE/COE model suggests the current price implies a sustainable return on equity (ROE) of c 13%, below our estimate of 14.9% for the current year.
Market background
This section provides updates on some of the indicators we monitor when assessing trends in the markets for the Advantage and Aspen businesses.
Exhibit 1 shows recent independent economic forecasts collected by HM Treasury. Unsurprisingly, the most significant change since the March data has been in expectations for 2022 inflation with the average rising from 5.8% to 7.6%. Otherwise, GDP growth forecasts are slightly lower but, so far, estimates for unemployment are unchanged.
Exhibit 1: Comparison of independent economic forecasts for the UK (May)
% |
Average |
Low |
High |
GDP growth |
|||
2022 |
4.0 |
3.0 |
5.6 |
2023 |
1.4 |
0.7 |
3.0 |
Labour Force Survey unemployment rate Q4 |
|||
2022 |
4.1 |
3.5 |
4.5 |
2023 |
4.1 |
3.2 |
5.0 |
Inflation Q4 (CPI) |
|||
2022 |
7.6 |
4.8 |
9.9 |
2023 |
2.5 |
1.0 |
6.9 |
Source: HM Treasury
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. The cost-of-living pressures are potentially particularly relevant for Advantage customers, although the company has previously noted that wages are likely to adjust and that its customers tend to depend on their vehicles for transport to work. Advantage has made allowance for the rise in inflation within its affordability calculations. In Exhibit 3 we can see that, after an increase in 2020, the unemployment rate has since moved slightly 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 now below pre-pandemic levels.
|
Exhibit 2: GfK UK consumer confidence indicator |
Exhibit 3: UK redundancies and unemployment |
|
|
|
Source: Refinitiv (last value January 2022) |
Source: ONS (last value January 2022) |
|
Exhibit 2: GfK UK consumer confidence indicator |
|
|
Source: Refinitiv (last value January 2022) |
|
Exhibit 3: UK redundancies and unemployment |
|
|
Source: ONS (last value January 2022) |
Next, we look at data on used car transactions and used car finance. Exhibit 4 compares the monthly sales pattern in the four years 2019–22. This highlights the sharp drop in used car transactions in April 2020. Volume recovered very well following the initial lockdown, albeit with a further dip after subsequent lockdowns. From April 2021 activity was close to pre-pandemic levels, as represented here by the 2019 monthly figures, although the prevailing supply limitations resulting from constraints on new car production tempered volumes. Exhibit 5 shows a similar pattern in used car finance with seasonal dips evident in addition to lockdown impacts. Calendar 2022 has started strongly albeit with Q122 slightly below the Q119 level.
|
Exhibit 4: Monthly used car transactions 2019–22 |
Exhibit 5: Used car finance through dealerships |
|
|
|
Source: SMMT (last value March 2021). |
Source: Finance and Leasing Association (last value March 2022). |
|
Exhibit 4: Monthly used car transactions 2019–22 |
|
|
Source: SMMT (last value March 2021). |
|
Exhibit 5: Used car finance through dealerships |
|
|
Source: Finance and Leasing Association (last value March 2022). |
Used car prices (see Exhibit 6) were buoyant in 2020 and then experienced a very sharp step up from mid-2021, with strong consumer demand and reduced supply pushing prices up. The latest reading for the index has shown a small decrease (of 3% month-on-month, see Exhibit 7) suggesting a slight softening of demand and/or easing of supply constraints. Nevertheless, prices remain at an historically high level and, as evidenced by the transaction and finance data above, demand is still strong. At the margin a 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 vehicles it finances. Provident Financial has referenced elevated levels of early terminations, driven by price levels (trading statement 19 May) but while Advantage has seen some increase this has not been a significant feature.
|
Exhibit 6: Second-hand car price index |
Exhibit 7: Monthly change in second-hand car prices |
|
|
|
Source: ONS CPI index (last value April 2022) |
Source: ONS CPI index, m-o-m % change |
|
Exhibit 6: Second-hand car price index |
|
|
Source: ONS CPI index (last value April 2022) |
|
Exhibit 7: Monthly change in second-hand car prices |
|
|
Source: ONS CPI index, m-o-m % change |
Advantage has continued to work on internal measures to strengthen the business. In the update it notes that it has made major progress on its marketing strategy with more accurate identification of customer profiles allowing it to work more efficiently with its broker, aggregator and digital partners.
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. The latest reading, for April 2022, shows an activity level similar to pre-pandemic levels. Lower consumer confidence and macro-economic developments could affect transaction volumes during the rest of the year. However, on a longer view, S&U sees 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 should also have significant scope for expansion now that it is more established in the market.
|
Exhibit 8: UK property transactions (seasonally adjusted) |
|
|
Source: HM Revenue & Customs. Note: Figures for February to April 2022 are provisional. SA = seasonally adjusted. |
Exhibit 9: 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 |
95,555 |
105,760 |
Impairments |
(19,596) |
(16,941) |
(17,220) |
(36,705) |
(4,120) |
(16,379) |
(19,791) |
||
Other cost of sales |
(17,284) |
(15,751) |
(19,872) |
(14,264) |
(18,771) |
(21,682) |
(22,492) |
||
Administration expenses |
(9,629) |
(10,763) |
(12,413) |
(10,576) |
(13,679) |
(13,187) |
(14,595) |
||
EBITDA |
|
|
33,272 |
39,515 |
40,434 |
22,216 |
51,319 |
44,307 |
48,882 |
Depreciation |
|
|
(294) |
(414) |
(450) |
(520) |
(529) |
(482) |
(449) |
Op. profit (incl. share-based payouts pre-except.) |
|
|
32,978 |
39,101 |
39,984 |
21,696 |
50,790 |
43,825 |
48,433 |
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) |
(4,535) |
(5,750) |
||
Profit before tax |
|
|
30,160 |
34,560 |
35,134 |
18,128 |
47,018 |
39,290 |
42,683 |
Tax |
(5,746) |
(6,571) |
(6,252) |
(3,482) |
(9,036) |
(7,465) |
(10,254) |
||
Profit after tax |
|
|
24,414 |
27,989 |
28,882 |
14,646 |
37,982 |
31,825 |
32,428 |
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 |
262.0 |
267.0 |
EPS - basic (p) |
|
|
203.8 |
233.2 |
239.6 |
120.7 |
312.8 |
262.1 |
267.1 |
Dividend per share (p) |
105.0 |
118.0 |
120.0 |
90.0 |
126.0 |
130.0 |
133.0 |
||
EBITDA margin (%) |
41.7% |
47.6% |
45.0% |
26.5% |
58.4% |
46.4% |
46.2% |
||
Operating margin (before GW and except.) (%) |
41.3% |
47.1% |
44.5% |
25.9% |
57.8% |
45.9% |
45.8% |
||
Return on equity |
16.7% |
17.6% |
16.8% |
8.1% |
19.6% |
14.8% |
14.0% |
||
BALANCE SHEET |
|||||||||
Non-current assets |
|
|
181,015 |
185,383 |
197,806 |
173,413 |
184,189 |
207,382 |
225,670 |
Current assets |
|
|
84,178 |
95,430 |
108,275 |
111,426 |
143,040 |
163,708 |
179,339 |
Total assets |
|
|
265,193 |
280,813 |
306,081 |
284,839 |
327,229 |
371,090 |
405,009 |
Current liabilities |
|
|
(7,927) |
(6,722) |
(7,424) |
(5,309) |
(8,789) |
(9,182) |
(9,637) |
Non current liabilities inc pref |
(104,450) |
(108,724) |
(119,183) |
(98,501) |
(111,693) |
(138,593) |
(155,493) |
||
Net assets |
|
|
152,816 |
165,367 |
179,474 |
181,029 |
206,747 |
223,315 |
239,879 |
NAV per share (p) |
1,276 |
1,375 |
1,493 |
1,490 |
1,704 |
1,840 |
1,977 |
||
CASH FLOW |
|||||||||
Operating cash flow |
|
|
(43,418) |
10,530 |
4,946 |
32,940 |
(2,094) |
(10,537) |
285 |
Net cash from investing activities |
(1,040) |
(785) |
(265) |
(1,112) |
(284) |
(310) |
(310) |
||
Dividends paid |
(11,377) |
(13,080) |
(14,461) |
(13,098) |
(12,263) |
(15,297) |
(15,904) |
||
Other financing (excluding change in borrowing) |
12 |
14 |
14 |
2 |
1 |
0 |
0 |
||
Net cash flow |
|
|
(55,823) |
(3,321) |
(9,766) |
18,732 |
(14,640) |
(26,144) |
(15,929) |
Opening net (debt)/cash |
|
|
(49,167) |
(104,990) |
(108,311) |
(118,077) |
(99,345) |
(113,985) |
(140,129) |
Closing net (debt)/cash |
|
|
(104,990) |
(108,311) |
(118,077) |
(99,345) |
(113,985) |
(140,129) |
(156,058) |
Source: S&U accounts, Edison Investment Research. Note: EPS on a reported basis.
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|
Research: Industrials
Cohort indicated in its closing FY22 trading update that it expects to deliver earnings in line with market expectations despite a c £10m shortfall in revenues. Part of the sales impact is due to a contract adjustment at Chess, but pandemic-related delays continued to affect other group companies. Order intake has remained strong and management expectations for FY23 are maintained, with order cover for FY23 sales of 69% (64% for FY21). With increasing global defence spending and a return to growth anticipated from this year, an FY23e P/E of 14.5x does not look demanding.
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