S&U — Results on track to meet FY24 expectations

S&U (LSE: SUS)

Last close As at 24/02/2024

GBP18.40

10.00 (0.55%)

Market capitalisation

GBP224m

More on this equity

Research: Financials

S&U — Results on track to meet FY24 expectations

S&U, the specialist motor and property finance lender, reported a good start to the financial year with profit before tax (PBT) up £0.3m in the period to 24 May despite group borrowing costs increasing by £3m versus the same period last year. A new £230m funding facility has increased total funding facilities to £280m, giving the group just under £100m to fund its growth plans over the next two years. Although rising interest rates are a headwind, credit quality remains strong, and S&U expects growth to continue in FY24. Our estimates remain unchanged.

Written by

Robert Murphy

Managing Director, Financials and Investment Trusts

Financials

S&U

Results on track to meet FY24 expectations

AGM and Q124 trading update

Insurance

26 May 2023

Price

2,500p

Market cap

£304m

Net debt (£m) at end January 2023

193

Shares in issue

12.2m

Free float

16.8%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.1

12.2

9.4

Rel (local)

11.2

16.9

9.9

52-week high/low

2,570p

1,905p

Business description

S&U’s Advantage motor finance business lends on a simple HP basis to lower- and middle-income groups that may have impaired credit records restricting access to mainstream products. It has c 65,000 customers. The Aspen property bridging business has been developing since its launch in 2017.

Next events

Q223 update

10 August 2023

Analysts

Rob Murphy

+44 (0)20 3077 5700

Armando Hoxha

+44 (0)20 3077 5700

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

S&U, the specialist motor and property finance lender, reported a good start to the financial year with profit before tax (PBT) up £0.3m in the period to 24 May despite group borrowing costs increasing by £3m versus the same period last year. A new £230m funding facility has increased total funding facilities to £280m, giving the group just under £100m to fund its growth plans over the next two years. Although rising interest rates are a headwind, credit quality remains strong, and S&U expects growth to continue in FY24. Our estimates remain unchanged.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/22

87.9

47.0

312.7

126.0

8.0

5.0

01/23

102.7

41.4

277.5

133.0

9.0

5.3

01/24e

119.3

42.9

268.4

133.0

9.3

5.3

01/25e

131.9

48.7

300.3

150.0

8.3

6.0

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

Advantage motor finance

Against a backdrop of limited supply in the new car market, the used car market remains robust with transactions up 4% in Q123 versus Q122 and used car values remaining above pre-pandemic levels (see Exhibits 5 to 8). Net receivables for Advantage have reached a record £311m versus £306m at end FY23 and £268m on 25 May 2022. Credit quality remains strong with above budget collections of 94%, while contractual payment arrears have fallen 25% compared to the same period last year. Although growth has paused while the group prepares for the Consumer Duty framework implementation due in July, management remains confident that current run rates and increases in transaction sizes to higher scoring customers should support a pick-up in growth for the rest of the year.

Aspen property bridging

Although higher interest rates have strained the residential property market, Aspen has grown considerably year-on-year. Net receivables for Aspen are £107m compared to £114m at end FY23 and £72m on 25 May 2022. PBT for Aspen is up 20.6% versus the same period last year. S&U reported total collection receipts of £22.3m (FY22: £20.2m). As the UK refinancing market slowed due to market conditions, the group experienced lower than anticipated extension and recovery receipts. Credit quality is good with 10 of the c 140 loans (c 7%) in default at the end of the quarter; S&U expects the defaulted loans to be recovered by the end of June.

Valuation: Trading below implied ROE for FY24

The shares are trading on an FY24e P/E multiple of 9.3x and dividend yield of 5.3%. Inputting our FY24 estimates of a 14% return on equity (ROE), 10% cost of equity (COE) and 2% growth rate into the ROE/COE model, we value S&U at 2,980p. At its current share price, keeping the COE and growth rate constant, the market is pricing in a ROE of 12.1%, which is below the historic average of 16% (between FY16 and FY23) and our respective estimates for FY24 and FY25 of 14% and 14.5%.

Market background

The current macroeconomic environment remains challenging, although key economic indicators are showing broad optimism in the outlook.

Economic forecasts for the UK have been upgraded, with Treasury data showing that expectations for GDP growth in the UK is now -0.1%, an improvement on the -0.2% expected in March. Meanwhile, the International Monetary Fund (IMF) upgraded its UK GDP growth forecast to 0.4% on 23 May. Consumer confidence appears to be slowly recovering as private and public wages continue to grow and unemployment remains low at 3.9%. The market for second hand cars remains robust, with prices still above pre-pandemic levels and monthly transactions higher in Q123 compared to Q122. The number of residential property transactions and monthly mortgage approvals has begun to cool off as a higher interest rate environment sweeps through the economy, squeezing incomes and increasing the cost of borrowing.

Both Advantage and Aspen are well positioned to benefit from this environment as demand for lending remains solid and credit quality is strong.

Key economic indicators

Between February and December 2022, UK GDP forecasts for 2023, collected by HM Treasury, trended downwards (see Exhibit 1). Since then, GDP forecasts have edged up, with the latest average showing a marginal reduction of 0.1% (see Exhibit 2). Most recently, the IMF projected that the UK GDP will expand 0.4% on the back of stronger wage growth, easing energy prices and the resolution of supply chain issues. According to the Office for National Statistics, average regular pay growth jumped 7.0% for the private sector and 4.8% for the public sector, between November 2022 and January 2023.

Having peaked at 5%, annual inflation (CPI) expectations have decreased to 4.1% a marginal bounce from estimates of 3.9% in April. CPI estimates for FY24 remain flat with previous estimates of 2.5%. Market estimates for unemployment slightly improved to 4.2% (4.3% in April), affirming the market assumption of a stronger-than-expected economy in the UK.

Exhibit 1: Evolution of UK economic forecasts for 2023

Exhibit 2: Independent forecasts for 2023 and 2024

%

Average

Average of new forecasts

GDP growth

 

2023

-0.1

0.2

2024

0.8

1.0

Labour Force Survey unemployment rate Q4

2023

4.2

4.2

2024

4.4

4.3

Inflation Q4 (CPI)

 

2023

4.1

3.9

2024

2.5

2.5

Source: Collected by HM Treasury (last reading May 2023)

Source: Collected by HM Treasury (May 2023)

Exhibit 1: Evolution of UK economic forecasts for 2023

Source: Collected by HM Treasury (last reading May 2023)

Exhibit 2: Independent forecasts for 2023 and 2024

%

Average

Average of new forecasts

GDP growth

 

2023

-0.1

0.2

2024

0.8

1.0

Labour Force Survey unemployment rate Q4

2023

4.2

4.2

2024

4.4

4.3

Inflation Q4 (CPI)

 

2023

4.1

3.9

2024

2.5

2.5

Source: Collected by HM Treasury (May 2023)

Exhibit 3 shows the consumer confidence about personal finances and the economic outlook between now and the next 12 months. The start of the Russia-Ukraine war on 24 February 2022 drove consumer confidence down as energy and food price hikes rippled through the economy, followed on by sequential interest rate increases that have almost levelled with the rates experienced during the 2008 financial crisis. However, most recently, the UK economy has seen strong growth in private and public sector wages and the outlook remains more positive than previously, supported by the upgrade in GDP forecasts by the IMF. Headline inflation is trending downwards into single digits (currently reported at 8.7% despite forecasts of 8.4%), as energy prices continue to slide, allowing the consumer to be more optimistic about the UK economic outlook.

In Exhibit 4, we observe the relationship between redundancies and unemployment. After the abnormal spike in 2020 due to COVID-19, redundancies returned to a normalised level shortly after. While redundancies retraced upwards in the second half of 2022, they have ticked lower in the past two months of reporting (February and March) as the UK economy has proven to be more resilient. Although unemployment remained stable in the last quarter of 2022, there are signs that it is rising and is currently 3.9% versus 3.7% in March 2022. We note that the labour market remains tight.

Exhibit 3: GfK UK consumer confidence indicator

Exhibit 4: UK redundancies and unemployment

Source: Refinitiv (last value May 2023)

Source: ONS (last value March 2023)

Exhibit 3: GfK UK consumer confidence indicator

Source: Refinitiv (last value May 2023)

Exhibit 4: UK redundancies and unemployment

Source: ONS (last value March 2023)

Indicators for Advantage motor finance

In Exhibit 5, we observe the monthly transactions between 2020 and the first three months of 2023. Volume recovered in a V-like fashion in the second half of 2020 following the initial impact of COVID-19 and subsequent lockdowns. Monthly transactions recovered in 2021 but supply issues, a result of constraints on new car production, moderated volumes. This trend continued into 2022. We note the seasonal nature of the market, with monthly transactions declining significantly at the end of the year.

In the first three months of 2023, volumes remained resilient, above the levels seen in 2022 and only below transactions experienced in 2020. However, the average number of transactions between January and March 2023 remains below the historical average (FY14–FY22) by around 26,623 transactions each month, or 4% of the average transactions between January and March 2023 (642,340).

Exhibit 6 displays both the value of advances and the number of cars that were bought on finance through dealerships. In the most recent March data, the value of advances remained above pre-pandemic levels but was 10% lower year-on-year. Similarly, the number of used cars bought in March was 8% lower than in March 2022.

In March the Finance and Leasing Association said that its research indicated that the value of new loans to consumers for used car purchases in 2023 may fall by 12%. However, S&U remains optimistic in the growth of its Advantage business as new car supply constraints are a persistent factor in keeping value and demand robust in the market for used car finance. Coupled with high collection rates, improved rates of arrears and increasing transaction sizes to higher scoring customers, Advantage remains well positioned to continue growing sustainably throughout the year.

Exhibit 5: Monthly used car transactions 2020–22

Exhibit 6: Used car finance through dealerships

Source: SMMT (last value March 2023)

Source: Finance and Leasing Association (last value March 2023)

Exhibit 5: Monthly used car transactions 2020–22

Source: SMMT (last value March 2023)

Exhibit 6: Used car finance through dealerships

Source: Finance and Leasing Association (last value March 2023)

Reduced supply and strong consumer demand drove used car prices upwards in mid-2021 (see Exhibit 7). Since then, prices have remained c 20% above those in June 2021. In the second half of 2022, monthly changes in used car prices have been less volatile compared to previous periods and seem to be hovering closer to a zero-percentage change, insinuating less demand and/or greater supply. Although a fall in prices would be negative for Advantage, it is relatively protected by the low value vehicles it finances (average advance of £7,799 in FY23).

Exhibit 7: Used car price index

Exhibit 8: Monthly change in used car prices

Source: ONS CPI Index (last value March 2023)

Source: ONS CPI Index. Note: Month-on-month % change.

Exhibit 7: Used car price index

Source: ONS CPI Index (last value March 2023)

Exhibit 8: Monthly change in used car prices

Source: ONS CPI Index. Note: Month-on-month % change.

Indicators for Aspen property bridging

Exhibit 9 shows the number of UK non-residential and residential transactions, with residential being more relevant for Aspen. In 2020, a wave of lockdowns and the implementation of a stamp duty holiday caused volatility in monthly transactions. Most recently, residential property transactions have returned to pre-pandemic levels and there are signs of a slight decline as the cost of borrowing continues to rise.

Following sequential interest rate increases in 2022, the cost of borrowing has risen, credit standards have tightened and unemployment has edged upwards. Consequently, the monthly number of mortgage approvals has fallen below its normalised rate (see Exhibit 10). We expect this trend to continue as further anticipated interest rate increases will further squeeze incomes and tighten credit standards.

Aspen acknowledges that the residential property market has been depressed, but its continued lending behaviour of focusing on experienced property developers with good assets and a high net worth has allowed Aspen to increase its lending activity while maintaining good credit quality.

Exhibit 9: UK property transactions

Exhibit 10: Monthly number of mortgage approvals

Source: HM Revenue & Customs. Note: Seasonally adjusted, to March 2023.

Source: Bank of England. Note: Seasonally adjusted, to March 2023.

Exhibit 9: UK property transactions

Source: HM Revenue & Customs. Note: Seasonally adjusted, to March 2023.

Exhibit 10: Monthly number of mortgage approvals

Source: Bank of England. Note: Seasonally adjusted, to March 2023.


Exhibit 11: Financial summary

£'000s

2019

2020

2021

2022

2023

2024e

2025e

Year end 31 January

Profit & Loss

Revenue

 

 

82,970

89,939

83,761

87,889

102,714

119,344

131,911

Impairments

(16,941)

(17,220)

(36,705)

(4,120)

(13,877)

(18,841)

(21,108)

Other cost of sales

(15,751)

(19,872)

(14,264)

(18,771)

(23,676)

(24,956)

(26,456)

Administration expenses

(10,763)

(12,413)

(10,576)

(13,679)

(15,731)

(16,708)

(18,468)

EBITDA

 

 

39,515

40,434

22,216

51,319

49,430

58,839

65,880

Depreciation

 

 

(414)

(450)

(520)

(529)

(525)

(551)

(652)

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

 

 

39,101

39,984

21,696

50,790

48,905

58,288

65,229

Exceptionals

0

0

0

0

0

0

0

Non-recurring items

0

0

0

0

0

0

0

Investment revenues / finance expense

(4,541)

(4,850)

(3,568)

(3,772)

(7,495)

(15,354)

(16,573)

Profit before tax

 

 

34,560

35,134

18,128

47,018

41,410

42,934

48,656

Tax

(6,571)

(6,252)

(3,482)

(9,036)

(7,692)

(10,327)

(12,164)

Profit after tax

 

 

27,989

28,882

14,646

37,982

33,718

32,607

36,492

Average Number of Shares Outstanding (m)

12.1

12.1

12.1

12.1

12.1

12.2

12.2

Diluted EPS (p)

 

 

232.0

239.4

120.7

312.7

277.5

268.4

300.3

EPS - basic (p)

 

 

233.2

239.6

120.7

312.8

277.5

268.4

300.3

Dividend per share (p)

118.0

120.0

90.0

126.0

133.0

133.0

150.0

EBITDA margin (%)

47.6%

45.0%

26.5%

58.4%

48.1%

49.3%

49.9%

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

47.1%

44.5%

25.9%

57.8%

47.6%

48.8%

49.4%

Return on equity

17.6%

16.8%

8.1%

19.6%

15.6%

14.0%

14.5%

Balance sheet

Non-current assets

 

 

185,383

197,806

173,413

184,189

222,031

244,786

267,645

Current assets

 

 

95,430

108,275

111,426

143,040

206,143

225,550

245,941

Total assets

 

 

280,813

306,081

284,839

327,229

428,174

470,336

513,586

Current liabilities

 

 

(6,722)

(7,424)

(5,309)

(8,789)

(6,918)

(7,605)

(8,118)

Non-current liabilities inc pref

(108,724)

(119,183)

(98,501)

(111,693)

(196,371)

(221,399)

(243,927)

Net assets

 

 

165,367

179,474

181,029

206,747

224,885

241,331

261,541

NAV per share (p)

1,375

1,493

1,490

1,702

1,852

1,987

2,153

Cash flow

Operating cash flow

 

 

10,530

4,946

32,940

(2,094)

(62,760)

(9,031)

(5,552)

Net cash from investing activities

(785)

(265)

(1,112)

(284)

(660)

(1,080)

(1,080)

Dividends paid

(13,080)

(14,461)

(13,098)

(12,263)

(15,546)

(16,161)

(16,282)

Other financing (excluding change in borrowing)

14

14

2

1

1

0

0

Net cash flow

 

 

(3,321)

(9,766)

18,732

(14,640)

(78,965)

(26,272)

(22,914)

Opening net (debt)/cash

 

 

(104,990)

(108,311)

(118,077)

(99,345)

(113,985)

(192,950)

(219,222)

Closing net (debt)/cash

 

 

(108,311)

(118,077)

(99,345)

(113,985)

(192,950)

(219,222)

(242,136)

Source: S&U, Edison Investment Research. Note: EPS is 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 2023 Edison Investment Research Limited (Edison).

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New Zealand

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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.

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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 2023 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.

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20 Red Lion Street

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Research: Consumer

OPAP — Revenue growth and margin leverage in Q123

OPAP’s Q123 results demonstrated continued strong growth in revenue, helped by improvements to both the retail and online product offering, and profits, with the support of a more favourable macroeconomic background as inflation has declined. The ongoing rejuvenation of the gaming offer is leading to growing player engagement and frequency of use. Management’s unchanged guidance for FY23 looks well-supported. The valuation and dividend yield (9.1%) look attractive relative to the peers.

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