S&U — Reduced impairments underpin increased profit

S&U (LSE: SUS)

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Research: Financials

S&U — Reduced impairments underpin increased profit

S&U reports that growth in lending at Advantage and Aspen has been somewhat constrained by the supply of used vehicles and houses for sale, but collections have been strong. At Advantage the level of impairment has been lower than expected, more than offsetting lower loan growth and prompting increases in our earnings estimates.

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Financials

S&U

Reduced impairments underpin increased profit

H122 update

Financial services

11 August 2021

Price

2,940p

Market cap

£357m

Debt (£m) at 10 August 2021

116

Shares in issue

12.1m

Free float

28%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

14.9

6.6

82.6

Rel (local)

13.8

5.3

50.0

52-week high/low

2,930.00p

1,475.00p

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 63,000 customers. The Aspen property bridging business has been developing, following its launch in early 2017.

Next events

H122 results

28 September 2021

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 reports that growth in lending at Advantage and Aspen has been somewhat constrained by the supply of used vehicles and houses for sale, but collections have been strong. At Advantage the level of impairment has been lower than expected, more than offsetting lower loan growth and prompting increases in our earnings estimates.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/20

89.9

35.1

239.4

120.0

12.3

4.1

01/21

83.8

18.1

120.7

90.0

24.4

3.1

01/22e

84.4

30.6

204.2

100.0

14.4

3.4

01/23e

90.9

33.2

221.7

110.0

13.3

3.7

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

Trading update for May to July

S&U’s trading update for the period from 20 May to 31 July indicated that it is trading well, with profitability, collections and book debt quality ahead of expectations. Advantage motor finance has seen strong levels of applications though transactions are slightly below an ambitious target (with cautious underwriting and limitations on supply of vehicles) leaving net receivables similar to the year-end level of £247m. This has been more than offset by strong collections with bad debt and impairment levels below expectation so the divisional H122 profit is expected to show a significant increase, ahead of budget. Advantage continues to work on improvements including refining its product offering, easing online payments and enhancing social media marketing. Aspen has benefited from a strong housing market (albeit with some supply constraints) and participation in the government-backed Coronavirus Business Interruption Loan Scheme (CBILS) and net receivables have reached nearly £58m (versus over £50m in the 20 May AGM update and £18.5m a year ago). Book quality and repayments remain good. Aspen has also refined its product offering and has strengthened its underwriting team to ensure delivery of a prompt and bespoke service.

Financial position, outlook and new estimates

The group reported current borrowing of £116m compared with £110m at the beginning of the period and total funding facilities of £180m. Looking ahead, Advantage should benefit from a gradual return to normal levels of business, subject to the evolution of the pandemic and UK economy. Aspen may see some further CBILS benefit in the current month and underlying growth in FY23, although replacing the CBILS lending as it matures may represent a challenge. Reflecting the trading update, our EPS estimates for FY22 and FY23 are increased by 28% and 5% respectively. For further detail see page 4.

Valuation

On our new forecasts the shares are trading on prospective P/Es of 14.4x and 13.3x for FY22 and FY23 respectively and a historic yield of 3.1%. Further potential recovery and growth are supportive factors.

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 independent forecasts for UK GDP and unemployment as collected by the UK Treasury in July. Compared with the May data shown in our last note, the average of new GDP forecasts has shown a further increase for 2021 and is marginally lower for 2022. The mitigation provided by the vaccination programme during the current wave of COVID-19 and the ability to push ahead with the easing of restrictions are likely to have been influential in the estimate increases. Unemployment expectations have been lowered further for both years and on all the measures shown. This should be positive for Advantage, if realised, as unemployment is a key sensitivity.

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

%

Average

Average of new forecasts

Low

High

GDP growth

2021

6.9

7.1

5.7

8.1

2022

5.5

5.4

4.5

8.2

Labour Force Survey unemployment rate Q4

2021

5.6

5.4

4.9

6.5

2022

4.9

4.7

4.3

5.9

Source: HM Treasury

Exhibit 2 shows a continued improvement in consumer confidence in recent months, despite the emergence of a further wave of COVID-19. Uncertainties remain and the further impact of COVID-19 is likely to fluctuate, but for the moment confidence in a progressive normalisation in economic activity seems to be growing. Exhibit 3 shows that the unemployment rate has moved up since early 2020 but appears to be flat or slightly lower on the latest, provisional, readings. Government job protection measures are still moderating the level of unemployment to some extent, leading to the expectation of a slightly higher rate by the end of December this year at 5.6% versus the May level of 4.8%. Redundancies, a more immediate measure, saw a very sharp spike as the pandemic took hold, but fell rapidly and have remained on a downward trend on recent figures.

Exhibit 2: GfK UK consumer confidence indicator

Exhibit 3: UK redundancies and unemployment

Source: Refinitiv (last value July 2021)

Source: ONS (last value May 2021)

Exhibit 2: GfK UK consumer confidence indicator

Source: Refinitiv (last value July 2021)

Exhibit 3: UK redundancies and unemployment

Source: ONS (last value May 2021)

We now turn to data on used car transactions and used car finance. Exhibit 4 shows the sharp drop in used car transactions in April 2020. Volume recovered very well following the initial lockdown, albeit with a further dip following subsequent lockdowns. April to June 2021 saw a return to activity levels close to pre-pandemic levels as represented here by the 2019 monthly figures, although the April bounce was smaller than industry participants had thought possible. Exhibit 5 shows a similar pattern in used car finance.

Exhibit 4: Monthly used car transactions 2019–21

Exhibit 5: Used car finance through dealerships

Source: SMMT. Note: Last value June 2021.

Source: Finance and Leasing Association. Note: Last value June.

Exhibit 4: Monthly used car transactions 2019–21

Source: SMMT. Note: Last value June 2021.

Exhibit 5: Used car finance through dealerships

Source: Finance and Leasing Association. Note: Last value June.

Used car prices (see Exhibit 6), were buoyant in 2020 and have remained so in 2021 to date, with strong consumer demand and reduced supply pushing prices up. The ONS data is supported by reports from auctioneer Aston Barclay and marked strength in the Autotrader retail price index. While Advantage’s exposure to auction prices for repossessed cars is moderated by the relatively low value of vehicles it finances, the strength in prices is a positive factor.

Exhibit 6: Second-hand car prices (CPI index)

Source: ONS (last value Q221)

Looking at the background for Aspen Bridging, Exhibit 7 shows the number of UK non-residential and residential transactions, with residential being most relevant for Aspen. Both have seen sustained improvement following the initial lockdown in 2020 with the latest residential data boosted as buyers sought to take advantage of the temporary increase in the stamp duty land tax nil rate band. 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. The CBILS lending mentioned earlier has given useful access to larger and more established developer customers as well as expanding the loan book in the short term.

Exhibit 7: UK property transactions (seasonally adjusted)

Source: HM Revenue & Customs. Note: Figures for April to June 2021 are provisional. SA = seasonally adjusted.

Estimate changes

Following the trading update we have adjusted our estimates with the key figures shown below and further details given in the Financial summary (Exhibit 9). The main changes we have made in our assumptions are as follows:

Reduced net receivables and loan book growth assumptions for Aspen and Advantage respectively to reflect the levels reported in the update. This results in the reductions in revenue shown below.

Reduced assumed impairment rate for Advantage to a level closer to pre-pandemic levels. This has a substantial positive impact on estimated profit for FY22 as shown and results in an increase in EPS for the year of 28%. The change for FY23 is more modest because we had already allowed for a significant normalisation of impairment levels.

We have not allowed for a ‘macro’ write back of the significant provisions made during FY21 at Advantage (a profit and loss charge of £36.0m versus £16.5m in FY20 resulting in end-year balance-sheet provisions of £92.6m). With the government furlough scheme still to fully unwind, there could be a need to use some of these provisions. Nevertheless, the year-end review of provisions could generate a one-off release.

Exhibit 8: 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 (%)

FY22e

88.6

84.4

-4.8%

23.9

30.6

28.3%

159.2

204.2

28.3%

100.0

100.0

0.0%

FY23e

94.5

90.9

-3.8%

31.8

33.2

4.6%

211.9

221.7

4.6%

110.0

110.0

0.0%

Source: Edison Investment Research

Valuation

P/E comparisons with peers remain difficult given the impact of forward-looking provisioning as a result of the COVID-19 pandemic. On our revised numbers, S&U trades on prospective multiples of 14.4x and 13.3x for FY22 and FY23 respectively. Given the five-year duration of Advantage loans and our assumptions on loan growth, even the FY23 forecast is unlikely to reflect a full recovery from the pandemic. At a share price of 2,940p, an ROE/COE model with an assumed cost of equity (COE) of 10% and long-term growth of 2% suggests the market is assuming a return on equity (ROE) of c 18%. This is above the 13.2% and 13.4% generated in our forecasts for FY22 and FY23, but the potential for further recovery and growth in both businesses are supportive factors here.

Exhibit 9: Financial summary

£'000s

2017

2018

2019

2020

2021

2022e

2023e

Year end 31 January

PROFIT & LOSS

Revenue

 

 

60,521

79,781

82,970

89,939

83,761

84,360

90,893

Impairments

(12,194)

(19,596)

(16,941)

(17,220)

(36,705)

(19,135)

(19,168)

Other cost of sales

(12,871)

(17,284)

(15,751)

(19,872)

(14,264)

(18,688)

(20,808)

Administration expenses

(8,332)

(9,629)

(10,763)

(12,413)

(10,576)

(11,642)

(12,543)

EBITDA

 

 

27,124

33,272

39,515

40,434

22,216

34,895

38,374

Depreciation

 

 

(253)

(294)

(414)

(450)

(520)

(528)

(475)

Op. profit (incl. share-based pay-outs pre-except.)

 

 

26,871

32,978

39,101

39,984

21,696

34,367

37,898

Exceptionals

0

0

0

0

0

0

0

Non recurring items

0

0

0

0

0

0

0

Investment revenues / finance expense

(1,668)

(2,818)

(4,541)

(4,850)

(3,568)

(3,769)

(4,690)

Profit before tax

 

 

25,203

30,160

34,560

35,134

18,128

30,599

33,208

Tax

(4,861)

(5,746)

(6,571)

(6,252)

(3,482)

(5,814)

(6,310)

Profit after tax

 

 

20,342

24,414

27,989

28,882

14,646

24,785

26,899

Average Number of Shares Outstanding (m)

12.0

12.1

12.1

12.1

12.1

12.1

12.1

Diluted EPS (p)

 

 

169.1

202.4

232.0

239.4

120.7

204.2

221.7

EPS - basic (p)

 

 

170.7

203.8

233.2

239.6

120.7

204.3

221.7

Dividend per share (p)

91.0

105.0

118.0

120.0

90.0

100.0

110.0

EBITDA margin (%)

44.8%

41.7%

47.6%

45.0%

26.5%

41.4%

42.2%

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

44.4%

41.3%

47.1%

44.5%

25.9%

40.7%

41.7%

Return on equity

15.2%

16.7%

17.6%

16.8%

8.1%

13.2%

13.4%

BALANCE SHEET

Non-current assets

 

 

138,004

181,015

185,383

197,806

173,413

210,660

234,004

Current assets

 

 

57,763

84,178

95,430

108,275

111,426

110,397

122,044

Total assets

 

 

195,767

265,193

280,813

306,081

284,839

321,057

356,048

Current liabilities

 

 

(17,850)

(7,927)

(6,722)

(7,424)

(5,309)

(4,151)

(4,396)

Non current liabilities inc pref

(38,450)

(104,450)

(108,724)

(119,183)

(98,501)

(122,923)

(142,845)

Net assets

 

 

139,467

152,816

165,367

179,474

181,029

193,982

208,807

NAV per share (p)

1,177

1,276

1,375

1,493

1,490

1,597

1,719

CASH FLOW

Operating cash flow

 

 

(27,431)

(43,418)

10,530

4,946

32,940

(10,226)

(8,273)

Net cash from investing activities

(308)

(1,040)

(785)

(265)

(1,112)

(250)

(250)

Dividends paid

(9,548)

(11,377)

(13,080)

(14,461)

(13,098)

(11,892)

(12,134)

Other financing (excluding change in borrowing)

21

12

14

14

2

0

0

Net cash flow

 

 

(37,266)

(55,823)

(3,321)

(9,766)

18,732

(22,368)

(20,657)

Opening net (debt)/cash

 

 

(11,901)

(49,167)

(104,990)

(108,311)

(118,077)

(99,345)

(121,713)

Closing net (debt)/cash

 

 

(49,167)

(104,990)

(108,311)

(118,077)

(99,345)

(121,713)

(142,370)

Source: S&U accounts, Edison Investment Research


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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.

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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.

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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.

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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 £49,500 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 2021 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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Financials

Alpha Bank — Q1 beat, buy-back proposal

Financials

Record — AUME momentum and a sharper focus

Financials

JDC Group — Well on track in 2024

Research: Consumer

Games Workshop Group — Indomitable

Games Workshop’s (GAW) FY21 results were at record levels from the perspective of revenue, profitability, cash flow generation and cash returns to shareholders, driven by the launch of the ninth edition of 40K as well as products from prior year releases. The phasing and scale of future new product releases in FY22 and FY23 may produce lower rates of growth than FY21. Management’s focus on product innovation, customer engagement and geographic expansion has tended to provide positive surprises. Our DCF-based valuation increases by c 8% to £129 per share.

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