paragon — Risk reduction should relieve the equity rating

paragon (FRA: PGN)

Last close As at 20/06/2024

3.02

−0.02 (−0.66%)

Market capitalisation

14m

More on this equity

Research: Industrials

paragon — Risk reduction should relieve the equity rating

paragon appears to be progressively de-risking its investment proposition. The agreed sale of Semvox crystallises an enterprise value (EV) that highlights the depressed market cap due to the debt burden. The accelerated redemption of the entire Swiss franc (CHF) bond issue and half the Eurobond reduces debt metrics to typical industrial levels, and we expect improving cash flows to facilitate final redemption in 2027. The result is an apparently anomalous rating for paragon compared to its estimated cash valuations and peers. Assuming the disposal completes and the bonds are redeemed as anticipated, the crushed equity value of recent years should finally be relieved.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

paragon_resized

Industrials

paragon

Risk reduction should relieve the equity rating

Disposal and early bond redemptions

Automobiles and parts

10 February 2023

Price

€5.26

Market cap

€24m

Adjusted net debt (€m) at 30 September 2022 (excludes leases €12.7m)

89.6

Shares in issue

4.5m

Free float

50.7%

Code

PGN

Primary exchange

Frankfurt Xetra

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

22.3

17.4

(16.2)

Rel (local)

16.6

3.4

(16.5)

52-week high/low

€6.24

€3.65

Business description

Based in Delbrück, Germany, paragon designs and supplies automotive electronics and solutions, selling directly to OEMs, including sensors, interior, body kinematics and power. It has production facilities in Germany, Croatia and China.

Next events

Swiss bond final

23 April 2023

FY22 results

26 April 2023

Q123 results

12 May 2023

Analysts

Andy Chambers

+44 (0)20 3077 5700

Natalya Davies

+44 (0)20 3077 5700

paragon is a research client of Edison Investment Research Limited

paragon appears to be progressively de-risking its investment proposition. The agreed sale of Semvox crystallises an enterprise value (EV) that highlights the depressed market cap due to the debt burden. The accelerated redemption of the entire Swiss franc (CHF) bond issue and half the Eurobond reduces debt metrics to typical industrial levels, and we expect improving cash flows to facilitate final redemption in 2027. The result is an apparently anomalous rating for paragon compared to its estimated cash valuations and peers. Assuming the disposal completes and the bonds are redeemed as anticipated, the crushed equity value of recent years should finally be relieved.

Year end

Revenue
(€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/20**

127.2

(6.0)

0.79

0.0

5.8

N/A

12/21

146.9

1.2

0.27

0.0

16.9

N/A

12/22e***

160.1

(1.9)

(0.38)

0.0

N/M

N/A

12/23e

173.5

4.6

0.74

0.0

7.1

N/A

12/24e

195.6

9.1

1.22

0.0

4.3

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. **Restated following Voltabox sale. ***paragon semvox discontinued from FY22e.

Trading momentum remains positive

paragon has announced that FY22 revenues for continuing activities rose 18% to €160.1m, ahead of guidance for €156.5m. paragon semvox (Semvox), the Digital Assistance business unit that is being sold and is to be treated as discontinued in FY22 accounts, generated sales of €12.8m. The positive sales momentum continued into the current year, with January revenues 29% ahead of the prior year at €14.6m. Although earnings have yet to be disclosed, we suspect that Semvox would generate above group average returns, so the ongoing EBITDA margin was likely below 15%, a level still consistent with previous management guidance.

Semvox sale facilitates early bond repayments

The €40m sale of Semvox announced in December should complete in Q223. The proceeds should be applied to fully redeeming the CHF21m 4% bond maturing on 23 April 2023, as well as early redemption of half the €50m 6.75% 2027 Eurobond in line with the extension terms agreed last year. Management has already bought back CHF8.4m through a tender offer in January, and on 6 February 2023 launched a repurchase programme for up to €5m of the Eurobond. The resulting reduction in debt to more typical levels should reduce finance charges by over €3m annually and allow management to focus on the growth plan for the ongoing activities.

Valuation: Risk discounts should moderate

The debt retirement should alleviate much of the risk discount applied to paragon. Even before the EPS enhancement from the interest savings, the low single-digit FY24 P/E multiple looks anomalous. In addition, the disposal should generate a c €15m profit while crystallising a substantial proportion of group EV. The lower financial risk bolsters cash-based valuations.

Semvox sale to financially underpin prospects

On 1 December 2022, paragon announced an agreement to sell its paragon semvox subsidiary (Semvox) to CARIAD, a software subsidiary of the Volkswagen Group, for c €40m. Semvox formed the digital assistance business unit of paragon. The deal is expected to complete by the end of April 2023, but there is a risk it could be delayed as it is contingent on several antitrust approvals. However, these are not considered by management to be likely to lead to delays given the scale of the business.

Adjusting earnings to treat Semvox as discontinued

Following the agreement, Semvox will be treated as a discontinued business from FY22. As a result, on 5 December 2022 paragon’s management updated guidance for FY22 and FY23 as well as providing a new five-year outlook to 2027.

In a release on 6 February 2023, management indicated that Semvox generated €12.8m in 2022. As a result of its disaggregation, paragon’s FY22 revenue from its continuing business was €160.1m, an increase of 18.2%, beating December 2022 guidance of €156.5m. While not explicitly disclosed to date, we expect the FY22 EBITDA margin for the continuing business to be reduced to less than 15% as Semvox appears to have been achieving higher than average EBITDA margins. In 2021 it achieved net income of €2.6m.

For FY23, revenue guidance was maintained at €170m and while implying slower growth than the c 10% previously indicated, this may be conservative. Management highlighted January 2023 revenues of €14.6m for the ongoing activities being 29% ahead of January 2022. We assume Semvox’s revenue growth was expected to be above the group rate. We think the new EBITDA margin guidance for the continuing paragon activities of 12–15% reflects an element of adverse business mix as new lower-margin contracts ramp up.

We have reduced our FY22 and FY23 earnings estimates to reflect the revised guidance and introduce our FY24 estimates.

Exhibit 1: Revisions to paragon earnings estimates (Semvox discontinued)

Year to December (€m)

2022e

2022e

 

2023e

2023e

 

2024e

 

Prior

New

Change

Prior

New

Change

New

Electronics

120.6

107.9

-10.6%

133.9

118.7

-11.4%

136.5

Mechanics

50.2

52.2

4.0%

54.2

54.8

1.1%

59.2

Total group revenues

170.8

160.1

-6.3%

188.1

173.5

-7.8%

195.6

 

 

 

 

 

 

 

Electronics

21.7

15.1

-30.5%

25.4

19.6

-23.1%

23.2

Mechanics

4.0

2.1

-48.0%

5.4

3.3

-39.3%

4.7

HQ Other and intersegment

0.2

0.2

8.7%

0.2

0.2

8.7%

0.2

EBITDA (pre PPA amortisation)

25.9

17.4

-32.9%

31.0

23.1

-25.7%

28.1

 

 

 

 

 

 

 

Underlying PBT continuing

2.9

(1.9)

N/M

7.4

4.6

-37.5%

9.1

 

 

 

 

 

 

 

EPS – underlying continuing (€)

0.47

(0.38)

N/M

1.19

0.74

-37.6%

1.22

DPS (€)

0.0

0.0

 

0.0

0.0

 

0.0

Adjusted net cash/(debt)

(89.0)

(88.9)

-0.2%

(83.8)

(84.1)

0.3%

(82.3)

Source: Edison Investment Research estimates

Five-year outlook also updated for continuing business

Management also updated its five-year outlook to FY27 (FY26 previously), again reflecting the agreed disposal of Semvox. It nevertheless expects revenues to almost double to more than €300m, a compound annual growth rate of around 14% over the five-year period. The previous longer-term guidance was for FY26 revenues of €250–300m with EBITDA margins of 20%. The revision in part reflects the elimination of growth at Semvox, but nevertheless represents a strong progression by the continuing businesses, especially in the recently created power business unit.

In our model, our FY27 revenue estimate is significantly below €300m.

The financial impact of selling Semvox

The numbers above are adjusted to reflect the performance of the continuing paragon automotive activities, but do not reflect the actual impact of completing the disposal of Semvox. As is normal practice, we only adjust for M&A transactions when deals are completed. Therefore, Semvox’s assets are still consolidated as held for sale current assets, net debt does not reflect the receipt of the disposal cash proceeds, with earnings and cash flows still consolidated as discontinued items.

On completion, the company should receive the c €40m cash proceeds and, as discussed below, these should be applied to substantial bond redemptions, with a major benefit to the net interest charge in FY23 and the future. Net debt should fall to around €42m (€89.6m at end-September 2022), of which only around $25m would be the outstanding 2027 6.75% Eurobond issue.

The result is that while continuing revenues and operating profits remain the same, PBT, net income and thus EPS should be significantly enhanced by the lower interest charges. We estimate the disposal should generate an exceptional profit on disposal of around €15m. We assume completion around the end of April 2023.

The financial benefits should notionally benefit our current estimates approximately as follows:

Exhibit 2: Potential impact on Edison’s paragon earnings estimates (assuming Semvox disposal completed)

Year to December (€m)

2023e

2023e

 

2024e

2024e

 

Current estimates

On disposal completion

Change

Current estimates

On disposal completion

Change

Electronics

118.7

118.7

0.0%

136.5

136.5

0.0%

Mechanics

54.8

54.8

0.0%

59.2

59.2

0.0%

Total group

173.5

173.5

0.0%

195.6

195.6

0.0%

 

 

 

 

 

 

Electronics

19.6

19.6

0.0%

23.2

23.2

0.0%

Mechanics

3.3

3.3

0.0%

4.7

4.7

0.0%

HQ Other and intersegment

0.2

0.2

0.0%

0.2

0.2

0.0%

EBITDA (pre PPA amortisation)

23.1

23.1

0.0%

28.1

28.1

0.0%

 

 

 

 

 

 

Underlying PBT

4.6

5.8

25.9%

9.1

12.0

32.5%

 

 

 

 

 

 

EPS - underlying continuing (€)

0.74

0.93

25.9%

1.22

1.70

38.9%

DPS (€)

0.0

0.0

 

0.0

0.0

 

Net cash/(debt)

(84.1)

(42.4)

-49.6%

(82.3)

(38.0)

-53.9%

Source: Edison Investment Research estimates

With notional FY23 EPS of €0.93 per share, the P/E multiple of 5.0x is not demanding, and falls sharply to just 2.7x in FY24. In addition, net debt to EBITDA should fall to 1.83x in FY23 and 1.35x in FY24, confirming the alleviation of the debt burden.

Early bond redemptions

On 10 January 2023 paragon launched a tender offer up to CHF10m nominal value of its CHF21m 4% bonds due for redemption in April 2023 (ticker: PAR19) issued in 2019. The offer was at 92.5% of the bonds’ par value. The offer period ended at midday (CET) on 27 January 2023, at which time paragon had bought back a total nominal amount of CHF8.433m of the PAR19 bonds, leaving CHF12.567m outstanding. With the Swiss franc/euro exchange rate at parity (CHF1:€1) settlement on 31 January 2023 (including 278 days accrued interest) should cost paragon around €8.1m.

Final redemption at par of the outstanding nominal is due on 23 April 2023.

In the 6 February 2023 announcement, management indicated it has launched a tender offer scheme for up to €5m nominal of the Eurobond that would run until 3 March 2023.

The agreed disposal of Semvox should trigger the accelerated repayment of all €25m of the interim redemption tranches of the €50m 6.75% 2027 Eurobond agreed on the extension last year. As a reminder, the early redemption schedule for half the outstanding bonds was in three tranches: €5m in 2023, €10m in 2025 and a further €10m in 2026. All become due on completion of the potential M&A project, which is Semvox. We assume the announced buyback scheme should offset the 2023 commitment. With the bonds currently trading at around 65% of the nominal value, the total early redemption might be achieved for a total cash cost of c €16m.

The outstanding €25m repayable on final maturity in 2027 would then be the only major financial liability carried by paragon, and the annual interest payable would reduce by c €3.1m (including CHF bond interest and 2.5% PIK1 interest on the Eurobond). Together with bank borrowings, the net debt to EBITDA ratio (the net leverage ratio) in FY23 would be just 1.83x, which would be in line with acceptable levels for similar industrial companies for the first time in many years. It should in turn lead to lower interest rates on the outstanding Eurobond as a reduction in the leverage ratio is a key factor in its adjustment. The cash interest payable would reduce as the net leverage ratio declines as follows: 6.50% if it falls below 4.0x at the last balance sheet date, 6.25% if it falls below 3.5x, 5.50% below 3.0x and 5.00% below 2.5x. With an expected improvement in net cash flow as the ongoing business grows revenues and margin, the leverage ratio should reduce further in subsequent years.

  PIK – payment in kind, a type of incremental interest payment.

As a result of the proposed Semvox disposal, management has secured bridge finance that should cover both the early redemption payments and the final redemption of the PAR19 CHF bonds. The bridging facility will be paid down when the c €40m proceeds for the sale are received in Q223.

Valuation

The deleveraging of paragon should have a positive impact on the risk assessment for the group, and thus on the cost of capital. In turn that boosts discounted cash flow (DCF) valuations for the group, underlining our previous view that paragon’s equity is adversely affected by the historical debt burden and more specifically the bond maturities. More normal industrial and automotive ratings metrics should then also be applied to the group.

The only significant outstanding issues that need clarification would appear to be the unanticipated circumstances surrounding the founders’ shareholding in the listed entity and the timing of a return to dividend payments in the future, which are currently restricted by the terms on the Eurobond until fully redeemed in 2027.

Our capped DCF has been rolled forward on an FY23 basis and now stands at €26.6 per share (previously €19.8 per share in August 2022 on an FY22 basis), adjusting for the discontinuation of Semvox by eliminating its cash flow and as an equivalence reducing net debt used for the calculation by the anticipated €40m proceeds. The calculation is still based on a 15% cost of equity but that should reduce as the bonds are redeemed and risk is alleviated. The resultant current WACC of 8.0% will benefit from lower risk levels, but as the debt funding reduces as a proportion of the EV there will be an offsetting upwards tendency towards the still higher cost of equity.

Exhibit 3: paragon capped DCF sensitivity to WACC and terminal growth rate (€/share)

WACC

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

Terminal value

0%

42.7

37.8

33.6

30.0

26.6

23.9

21.4

19.3

17.3

1%

43.2

38.2

34.0

30.3

26.9

24.2

21.7

19.5

17.6

2%

43.6

38.6

34.3

30.6

27.2

24.4

22.0

19.8

17.8

3%

44.1

39.0

34.7

31.0

27.6

24.7

22.2

20.0

18.0

Source: Edison Investment Research estimates

While the jump in valuation may seem surprising, it should be noted that we have slightly increased our forecasts for the ongoing businesses following the better-than-expected trading in FY23 and we also start with a reduced level of net debt in the calculation, following FY22 estimated debt reduction that adds around €3.3 per share.

The €26.6 per share DCF value would be a multiple of 15.6x our notional post disposal FY24 EPS estimates (Exhibit 2). While this might look ambitious today, we feel that such a multiple could increasingly be supported by fundamental metrics, as ongoing debt reduction reduces risk.

It is worth noting that the agreed disposal of Semvox will crystallise an EV of around €40m for a small part of the group (around 8% of sales and 20% of EBITDA). That compares to the current group EV of just over €110m.

As the debt reduction should substantially de-risk paragon, we would expect a further re-rating to be plausible as the growth strategy for the ongoing activities is executed over the next five years.

Exhibit 4: Financial summary

€m

2020*

2021

2022e**

2023e

2024e

Year end December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

127.2

146.9

160.1

173.5

195.6

Cost of Sales

(69.2)

(72.6)

(75.2)

(79.8)

(88.0)

Gross Profit

58.0

74.4

84.8

93.7

107.6

EBITDA

 

 

13.8

20.0

17.4

23.1

28.1

Operating Profit (before amort. and except).

6.6

13.3

10.3

14.1

18.6

Intangible Amortisation

(6.0)

(6.0)

(4.4)

(2.5)

(2.8)

Exceptionals

(11.2)

(6.5)

(7.1)

(4.0)

(4.0)

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

(10.6)

0.8

(1.3)

7.6

11.8

Net Interest

(6.5)

(6.1)

(7.8)

(7.0)

(6.8)

Profit Before Tax (norm)

 

 

(6.0)

1.2

(1.9)

4.6

9.1

Profit Before Tax (FRS 3)

 

 

(17.2)

(5.3)

(9.0)

0.6

5.1

Tax

9.6

(0.2)

0.5

(1.2)

(2.5)

Discontinued

(37.1)

(5.9)

3.0

1.0

0.0

Profit After Tax (norm)

3.6

1.2

(1.7)

3.4

5.5

Profit After Tax (FRS 3)

(44.7)

(11.4)

(5.5)

0.3

2.6

Average Number of Shares Outstanding (m)

4.5

4.5

4.5

4.5

4.5

EPS - normalised (€)

 

 

0.79

0.27

(0.38)

0.74

1.22

EPS - normalised fully diluted (€)

 

 

0.79

0.27

(0.38)

0.74

1.22

EPS - (IFRS) (€)

 

 

(9.87)

(2.52)

(1.22)

0.08

0.58

Dividend per share (€)

0.00

0.00

0.00

0.00

0.00

Gross Margin (%)

45.6

50.6

53.0

54.0

55.0

EBITDA Margin (%)

10.8

13.6

10.9

13.3

14.4

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

5.2

9.1

6.4

8.1

9.5

BALANCE SHEET

Fixed Assets

 

 

143.1

115.0

68.6

66.7

67.0

Intangible Assets

81.5

76.4

41.2

39.2

37.3

Tangible Assets

47.0

36.2

24.6

24.6

26.9

Right of use asset

13.1

1.8

2.3

2.3

2.3

Investments

1.5

0.6

0.6

0.6

0.6

Current Assets

 

 

57.4

44.7

68.3

68.7

71.7

Stocks

27.3

24.0

24.0

24.7

26.5

Debtors

11.6

10.9

10.4

10.3

10.5

Cash

5.7

1.5

1.5

1.5

1.5

Other

12.7

8.4

32.5

32.3

33.3

Current Liabilities

 

 

(90.6)

(125.5)

(32.2)

(35.0)

(37.6)

Creditors

(41.3)

(31.9)

(32.2)

(35.0)

(37.6)

Short term borrowings

(49.3)

(93.6)

0.0

0.0

0.0

Long Term Liabilities

 

 

(96.6)

(30.9)

(107.0)

(102.2)

(100.5)

Long term borrowings

(67.6)

(10.2)

(90.3)

(85.5)

(83.8)

Lease liabilities

(18.7)

(12.1)

(10.1)

(10.1)

(10.1)

Other long term liabilities

(10.4)

(8.6)

(6.6)

(6.6)

(6.6)

Net Assets

 

 

13.2

3.3

(2.2)

(1.9)

0.7

CASH FLOW

Operating Cash Flow

 

 

11.6

19.8

19.2

24.6

26.7

Net Interest

(6.5)

(6.1)

(7.8)

(7.0)

(6.8)

Tax

9.6

0.0

0.2

(1.2)

(3.5)

Capex

(7.7)

(17.5)

(8.2)

(11.5)

(14.7)

Acquisitions/disposals

0.0

8.4

0.0

0.0

0.0

Financing

1.9

6.5

10.0

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

Net Cash Flow

8.9

11.1

13.5

4.8

1.8

Opening net debt/(cash)

 

 

117.4

111.2

102.3

88.9

84.1

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

(2.7)

(2.2)

(0.0)

(0.0)

(0.0)

Closing net debt/(cash) (excluding leases)

111.2

102.3

88.9

84.1

82.3

Total financial liabilities

 

 

130.0

114.4

98.9

94.1

92.4

Source: Company reports, Edison Investment Research estimates. Note: *FY20 restated following Voltabox sale. **paragon semvox treated as discontinued from FY22e.


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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.

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

General disclaimer and copyright

This report has been commissioned by paragon and prepared and issued by Edison, in consideration of a fee payable by paragon. 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.

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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S&U — FY23 results set to meet expectations

S&U’s year-end trading update confirmed that trading for both Advantage motor finance and Aspen property bridging has remained excellent since its last update in December. Full-year results, due on 28 March, are expected to meet expectations and be above budget. The economic background and tightened lending criteria are likely to have an impact in FY24, but there is still scope for more measured, responsible growth in S&U’s areas of specialist lending expertise.

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