S&U — Positive update despite macro uncertainties

S&U (LSE: SUS)

Last close As at 17/05/2024

GBP20.10

−30.00 (−1.47%)

Market capitalisation

GBP245m

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Research: Financials

S&U — Positive update despite macro uncertainties

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.

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Financials

S&U

Positive update despite macro uncertainties

AGM trading update

Financial services

30 May 2022

Price

2,400p

Market cap

£291m

Borrowings (£m) at 25 May 2022

125

Shares in issue

12.1m

Free float

28%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.1)

(11.5)

(12.5)

Rel (local)

(3.7)

(11.9)

(16.1)

52-week high/low

2,950p

2,200p

Business description

S&U’s Advantage motor finance business lends on a simple hire-purchase basis to lower- and middle-income groups who may have impaired credit records that restrict their access to mainstream products. It has c 62,000 customers. The Aspen property bridging business has been developing, following its launch in early 2017.

Next events

Q222 update

Early August 2022e

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

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

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*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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.


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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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

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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.

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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

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1185 Avenue of the Americas

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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

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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