S&U — Seeing recovery and adapting to grow

S&U (LSE: SUS)

Last close As at 22/05/2024

GBP20.08

−12.50 (−0.62%)

Market capitalisation

GBP244m

More on this equity

Research: Financials

S&U — Seeing recovery and adapting to grow

S&U recorded a dramatic increase in profit in FY22, but the more telling point is that average pre-tax profit for FY22 and FY21 was nearly £33m, only slightly below the pre-pandemic level of £35m (FY20). In the meantime, the group has continued to refine and develop both its businesses, which should underpin medium-term growth even if the near-term macro background is uncertain.

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Financials

S&U

Seeing recovery and adapting to grow

FY22 results

Financial services

1 April 2022

Price

2,390p

Market cap

£290m

Net debt (£m) at 31 January 2022

114

Shares in issue

12.1m

Free float

28%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.4)

(10.0)

8.0

Rel (local)

(7.0)

(9.6)

(1.2)

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

AGM

26 May 2022

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 recorded a dramatic increase in profit in FY22, but the more telling point is that average pre-tax profit for FY22 and FY21 was nearly £33m, only slightly below the pre-pandemic level of £35m (FY20). In the meantime, the group has continued to refine and develop both its businesses, which should underpin medium-term growth even if the near-term macro background is uncertain.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/21

83.8

18.1

120.7

90.0

19.8

3.8

01/22

87.9

47.0

312.7

126.0

7.6

5.3

01/23e

95.6

39.3

262.0

130.0

9.1

5.4

01/24e

105.8

42.7

267.0

133.0

9.0

5.6

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

FY22 profit bounces and receivables growth resumes

S&U's results for the year to end January showed a stronger than expected bounce back from the pandemic-affected FY21 results. Advantage motor finance transactions have been held back by a market shortage of used cars and only returned to a more normal level at the end of FY22, but loan growth at Aspen property bridging was strong (receivables were up 5% and 87% respectively). This resulted in overall revenue growth of 5%, while strong collections at Advantage and a swing from abnormally large pandemic-related loan provisions to an unusually low charge allowed group pre-tax profit to increase from £18.1m to £47.0m. Taking FY21 and FY22 together, pre-tax profit averaged £32.6m compared with £35.1m in FY20: a resilient outcome in the circumstances. Fully diluted EPS increased from 120.7p (FY21) to 312.7p (FY22). The full year dividend is 126p (+40%).

Outlook: Positive despite macro uncertainty

S&U’s main Advantage motor finance business has begun to see an improving trend in transactions and as the supply of new cars picks up, releasing more used cars to the market, this should spur faster growth. In the near term, both Advantage and Aspen could be affected by weaker consumer confidence and, at Advantage, cost of living pressures. Both companies are making progress in developing their business, with Advantage working to enhance marketing and hone efficiency, while Aspen has strengthened its team and added new products, and should benefit from the supply/demand imbalance in the UK housing market over the longer term.

Earnings estimates and valuation

Our estimates are increased slightly, with EPS raised by 2% and 3% for FY23 and FY24 respectively. Following the exceptionally low level of loan loss provisions in FY22 we expect a normalisation in FY23, hence the reduction in pre-tax profit between the two years, from £47m to £39m. This still leaves the prospective multiple only just above 9x. The disparity between profits and earnings growth in FY24 is the result of allowing for the increase in corporation tax to 25%. The historical and prospective yield of over 5% should be supportive for the share price.

Investment summary

S&U is an established specialist lender with businesses addressing the non-prime motor finance and the property bridging markets. While Advantage motor finance was significantly affected by the pandemic, it has a record of strong, profitable growth and has demonstrated a strong bounce back as restrictions were released. It has also continued to work on improvements to support longer-term growth. Aspen Bridging, a relatively new business, has gained experience and is scaling up to make a more significant contribution to the group while maintaining a conservative underwriting approach. The Coombs family owns c 52% of the equity and management takes a long-term, sustainable approach to the development of the group. The shares are valued at c 1.4x book, a level that would be consistent with a return on equity (ROE) of 13.2%; this is below the 14% or more we estimate for FY22 and FY23 and the pre-COVID-19 five-year historical average of over 16%.

A long history incorporating substantial change

S&U’s origins lie in a business founded by the chairman’s grandfather in 1938. That evolved into a home collected credit company and in 1999 a nonprime motor finance business was added with the foundation of Advantage Finance. The sale of the home collected credit business to Non Standard Finance in 2015 for £82.5m represented a significant change for the group and provided the means to finance a £15m special dividend and to invest in continued strong growth at Advantage and subsequently the formation of a new property bridging business (Aspen Bridging) in 2017.

Long-term growth in non-prime motor finance

Advantage Finance was formed in 1999 and is based in Grimsby with c 180 employees. Graham Wheeler took over as managing director in 2019, bringing extensive experience as a senior executive in the motor finance sector, while much of the management team has been with the company since launch. Advantage has a strong long-term growth record and, at £259m, net customer receivables have grown at a 10-year compound growth rate of 20%, even after a contraction in FY21 as a result of the pandemic. The company has c 62,000 live customers and recorded 19,747 new transactions in FY22 (pre-pandemic it had over 23,000 transactions in FY20). Advantage focuses on the non-prime area of the market, all loans are hire purchase loans and 90% of its lending is through over 40 brokers, with 5% each direct from dealerships and existing customers. The broker-sourced business is divided roughly 60/40 between internet and dealership brokers. S&U has relationships with the largest UK brokers including names such as Carfinance247, Zuto, Evolution Funding, Jigsaw and Midland Credit. This gives access to both large dealership networks and smaller local dealers.

Almost all the loan applications are submitted to the Advantage web-based system, which provides immediate in-principle lending decisions. The in-house IT capability at Advantage (about 10% of the staff) is an important enabler for the business as it helps maintain a high-speed response to loan applications (within 10 seconds for 95% of all applications) and rapid adjustments to systems to meet business requirements. An example of this was the introduction of a third credit rating agency (Equifax was added to Experian and TransUnion) including the merging of its data into the score card. Current projects include linking the scorecard to aggregators and decision-making platforms (including CrediCar, HD Decisions and Motiv Finance) to allow a better matching of applicants to Advantage’s offering.

Most loans range from £5,000 to £9,000, with a maximum loan amount of £15,000; the average advance in FY22 was £7,138. The average original term was 53 months with a flat interest rate of 16.3% (on a typical loan of £7,000, c £12,400 is repayable including interest and fees). The provisional approval rate for loan applications in the last financial year was approximately 40%, with c 0.6m out of c 1.5m applications approved. The 19,747 that actually signed up in FY22 were therefore equivalent to about 3% of approvals or 1% of original applications. The small ratio of deals signed in part reflects buyers’ use of the internet to source finance before shopping for a car and is not onerous for Advantage given the automation of responses to applications. Advantage’s Dealflo esignature system helps to support the sign-up rate following approval, by guiding customers through terms and conditions and verifying their digital signatures.

Advantage had achieved 20 years of consecutive profit growth until FY21, reflecting growth in the loan book paired with successful credit control, underpinned by continuous refinement of a bespoke underwriting and scoring system, developed in conjunction with Experian and referencing a range of data sources. The pandemic affected FY21 results through substantial forward-looking impairment provisions. Exhibit 1 shows the development in receivables, revenue and profit margin at Advantage since 2011. Growth accelerated in the post financial crisis period (notably from 2013) when limited availability of credit created a particularly favourable environment with customers who might previously have been served by the incumbent banks migrating to specialist providers such as Advantage. Revenue and margin benefited subsequently with the latter rising to more than 40% for four years followed by a moderation as a result of rising broker commission and impairments, and, to a lesser extent, the withdrawal from the sale of gap insurance (2015). In FY21 the impact of the pandemic on margins was marked as increased provisioning almost halved the profit margin. In FY22 a reduction in the provision charge to below normal levels together with strong collection performance lay behind the bounce in margin to 55% (see discussion of FY22 results for more detail).

Exhibit 1: Motor receivables and revenue

Source: S&U, Edison Investment Research

Property bridging finance: A diversifying source of growth

Aspen Bridging launched as a pilot project in February 2017 to test the viability of developing property bridging finance as a diversifying activity and alternative source of growth for the group. In November 2018, S&U announced that it would move on from the pilot stage and invest further in the business.

Loans are made for refurbishment, light development or investment in the residential, houses of multiple occupation, prime semi-commercial and prime commercial market segments. The average original term is 11 months with an option for Aspen to extend the term by two months where appropriate; repayment is financed by sale or re-mortgaging. Loans are all unregulated (not owner-occupier) and are secured with a first charge. The maximum loan size is £10m. S&U notes that it is addressing a market niche financing projects that larger institutions would find difficult to service with the speed and flexibility Aspen can offer.

Aspen follows a cautious underwriting approach with a process that includes third-party legal and valuation input, together with a site meeting with each customer by a member of the 20-strong Aspen team. Since launch 369 loans have been provided with an average gross value of c £500,000 and maximum gross loan to value of 72%. At end FY22 net receivables stood at £63.4m and during the year there were 111 transactions with a gross average loan size of £618,000 (excluding 24 Coronavirus Business Interruption Loan Scheme (CBILS) loans with an average value of £1.8m).

FY22 results analysis

Exhibit 2 provides a summary of the results for FY22 compared with FY21 and FY20. We highlight a number of points from this, comparing the FY22 result with FY21 unless stated.

Looking at the level of customer receivables we can see that the number of new motor loans recovered significantly but not to the FY20 level. This and strong collections left motor finance receivables up 5%. Property bridging continued its development with receivables up 87% in the year. Taking the two businesses together, the average level of customer receivables increased by 6% and, reflecting the mix of revenue margins, group revenue increased by nearly 5%.

The major driver of the profit improvement compared with FY21 was the sharp reduction in the motor finance loan loss charge. This reflects the forward-looking nature of provisions required under IFRS 9 and was £3.8m compared with £36m in FY21 and a more normal £16.5m in FY20; it included a small net write-back in H222 (£1m).

Exhibit 2: FY22 P&L analysis

£000 unless shown

FY20

FY21

FY22

y-o-y % change

Number of new motor loans

23,334

15,589

19,747

26.7

Motor finance receivables at period end

280,757

246,766

259,036

5.0

Bridging receivables at period end

20,993

34,144

63,879

87.1

Revenue

Motor finance

85,465

79,553

78,898

-0.8

Property bridging

4,474

4,208

8,991

113.7

Total

89,939

83,761

87,889

4.9

Loan loss provision

Motor finance

(16,507)

(35,995)

(3,805)

-89.4

Property bridging

(713)

(710)

(315)

-55.6

Total

(17,220)

(36,705)

(4,120)

-88.8

Other cost of sales

(19,872)

(14,264)

(18,771)

31.6

Administration expenses

(12,413)

(10,576)

(13,679)

29.3

EBITDA

40,434

22,216

51,319

131.0

Depreciation

(450)

(520)

(529)

1.7

Operating profit / loss

39,984

21,696

50,790

134.1

Finance expense

(4,850)

(3,568)

(3,772)

5.7

Pre-tax profit

35,134

18,128

47,018

159.4

Tax

(6,252)

(3,482)

(9,036)

159.5

Net profit

28,882

14,646

37,982

159.3

EPS fully diluted (p)

239.4

120.7

312.7

159.1

Dividend per share (p)

120.0

90.0

126.0

40.0

Source: S&U, Edison Investment Research

Cost of sales increased by 32%, reflecting in part increased commission payments as transaction numbers rose, while other administration costs were up 29% as bonus payments increased and pay restraints were eased as business conditions normalised.

This left operating profit up by more than 130% and pre-tax profit and fully diluted EPS increased by nearly 160% at £47m and 312.7p respectively. Taking into account the 216p average of FY21 and FY22 earnings per share (given the pandemic-driven volatility), the group has proposed a final dividend of 57p giving a full year total of 126p (+40%) as this gives an average dividend for the two years of 108p, in line with the group’s aim to pay twice-covered dividends.

Exhibit 3 shows how the pandemic affected the payment profile in Advantage motor finance and the improvement seen in FY22. Here accounts on payment holiday were included as in arrears to illustrate the effect on cash payments (in the accounts, in line with Bank of England guidance, they were not counted as part of Stage 3 or credit impaired provisioning). In the analysis the proportion of net receivables where payments are up to date declined by 17 percentage points between FY20 and FY21. In contrast, FY22 has seen an improvement of more than 10 points to 71.5%, still below the pre-pandemic level of 77.9% in FY20.

Exhibit 3: Motor finance receivables payments analysis

% unless shown

FY20

FY21

FY22

Up to date

77.9

60.8

71.5

Monthly payments past due - up to:

1

9.0

4.5

5.9

2

3.9

3.3

2.9

3

2.4

7.8

4.4

4

1.5

5.1

2.5

5

0.9

3.5

1.7

6

0.6

2.9

1.9

Over 6

2.0

10.1

7.5

Legal and debt recovery

1.8

1.9

1.6

Total net receivables

100.0

100.0

100.0

Total net receivables (£m)

280.8

246.7

259.0

Source: S&U, Edison Investment Research. Note: Payment holidays here are shown as arrears.

Exhibit 4 sets out the analysis of balance-sheet loan-loss provisions for FY20, FY21 and FY22. This shows how total provisions as a percentage of gross receivables increased from 18% to 27% between FY20 and FY21 before declining modestly to 26% at end FY22. Therefore, even though the FY22 loan loss provision for motor finance in the profit and loss account fell substantially, the balance sheet provision coverage remains relatively high.

Exhibit 4: Balance-sheet loan-loss provision analysis – motor finance

Year end January

FY20

FY21

FY22

FY20

FY21

FY22

£m

% of gross receivables

Stage 1 (12 months ECL)

13.4

14.4

22.1

3.9

4.2

6.3

Stage 2 (lifetime ECL)

0.1

12.8

2.8

0.0

3.8

0.8

Stage 3 – impaired (lifetime ECL)

49.9

65.5

66.6

14.5

19.3

19.0

Total provision

63.4

92.6

91.5

18.4

27.3

26.1

Gross receivables

344.1

339.4

350.5

100.0

100.0

100.0

Source: S&U, Edison Investment Research. Note: ECL= expected credit loss

Background and outlook

In this section, we update the background data we track as indicators for Advantage and Aspen, starting with economic and industry figures relevant for the used car finance market.

Exhibit 5 shows independent forecasts for UK GDP, unemployment and inflation as collected by the UK Treasury in March. Compared with the 2022 forecasts collated in January, average GDP expectations are slightly lower (4.2% vs 4.5%), unemployment estimates marginally lower and inflation notably higher (5.8% vs 3.5%). The FY23 estimates, now included, show a normalisation of growth following the post-pandemic recovery, stable unemployment and lower inflation. While the stability of unemployment indicated would be favourable for Advantage, we would caution that the forecasts have yet to capture the additional uncertainty introduced by the war in Ukraine. The increase in inflation expectations has prompted Advantage to adjust its affordability calculation, while its experience in coping with the impact of the pandemic demonstrates is ability to work with customers flexibly when they encounter difficulties.

Exhibit 5: Comparison of independent economic forecasts for the UK (March)

%

Average

Low

High

GDP growth

2022

4.2

3.3

5.7

2023

1.7

0.6

3.0

Labour Force Survey unemployment rate Q4

2022

4.1

3.7

4.7

2023

4.1

3.2

4.5

Inflation Q4 (CPI)

2022

5.8

3.3

8.3

2023

2.3

1.0

6.4

Source: HM Treasury

Exhibit 6 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 notes that wages are likely to adjust and that its customers tend to depend on their vehicles for transport to work. As noted above, Advantage has made allowance for the rise in inflation within its affordability calculations. Exhibit 7 shows that, after an increase, the unemployment rate has moved close to prior levels while forecasts have also been falling. 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 6: GfK UK consumer confidence indicator

Exhibit 7: UK redundancies and unemployment

Source: Refinitiv (last value January 2022)

Source: ONS (last value January 2022)

Exhibit 6: GfK UK consumer confidence indicator

Source: Refinitiv (last value January 2022)

Exhibit 7: UK redundancies and unemployment

Source: ONS (last value January 2022)

Next we look at data on used car transactions and used car finance. Exhibit 8 compares the monthly sales pattern in the three years 2019–21. 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 following subsequent lockdowns. Since April 2021 activity has been close to pre-pandemic levels, as represented here by the 2019 monthly figures, although the final quarter of 2021 saw volumes below the 2019 level, probably reflecting the prevailing supply limitations. Exhibit 9 shows a similar pattern in used car finance with seasonal dips evident in addition to lockdown impacts. Looking ahead, Advantage notes that much will depend on consumer confidence but that it expects transaction numbers to return to increased growth in the final third of FY23 as used car availability gradually normalises.

Exhibit 8: Monthly used car transactions 2019–21

Exhibit 9: Used car finance through dealerships

Source: SMMT. Note: Last value December 2021.

Source: Finance and Leasing Association. Note: Last value January 2022.

Exhibit 8: Monthly used car transactions 2019–21

Source: SMMT. Note: Last value December 2021.

Exhibit 9: Used car finance through dealerships

Source: Finance and Leasing Association. Note: Last value January 2022.

Used car prices (see Exhibit 10) 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 ONS data are fully supported by marked strength in the Autotrader retail price index. An improving supply of new cars and hence used stock seems likely during 2022 and Advantage confirms that it expects a gradual improvement during the year. Exhibit 11 shows the month-on-month change in the price index underlining the changes in trend and a stabilisation of prices in the most recent months. At the margin a fall in auction prices, prompted by 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. Also, for the moment, the demand side of the equation appears to remain robust.

Exhibit 10: Second-hand car price index

Exhibit 11: Monthly change in second-hand car prices

Source: ONS CPI index (last value February 2022)

Source: ONS CPI index, m-o-m % change

Exhibit 10: Second-hand car price index

Source: ONS CPI index (last value February 2022)

Exhibit 11: Monthly change in second-hand car prices

Source: ONS CPI index, m-o-m % change

Advantage also looks to work on a number of initiatives to strengthen branding and marketing and increase efficiency. This includes entry to the aggregator car finance market, digital marketing to capture customer renewals, re-design of the website and the development of affinity and other partnerships.

Turning to the background for Aspen Bridging, Exhibit 12 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 here, for February 2022, shows an activity level slightly above 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 12: UK property transactions (seasonally adjusted)

Source: HM Revenue & Customs. Note: Figures for December 2021 to February 2022 are provisional. SA = seasonally adjusted.

Financials

Changes in key numbers from our estimates are shown in Exhibit 13 and further details are included in Exhibit 14. For FY22 and FY23 earnings per share are increased by 2% and 3%, respectively, reflecting only modest assumption changes.

Exhibit 13: 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 (%)

FY22

87.6

87.9

0.3%

45.0

47.0

4.5%

300.1

312.7

4.2%

120.0

126.0

5.0%

FY23e

95.6

95.6

0.0%

38.5

39.3

2.0%

256.9

262.0

2.0%

127.0

130.0

2.4%

FY24e

104.2

105.8

1.5%

41.5

42.7

2.9%

259.4

267.0

2.9%

129.0

133.0

3.1%

Source: Edison Investment Research. Note: For FY22 old figures are our pre-results estimates and new are actual.

The next table gives details of our estimate assumptions. In the motor business we have allowed for receivables growth of 10% and 6% for FY22 and FY23, respectively, and look for a normalisation in the level of impairments in both years, leaving FY23 impairments at 20% of revenue and the risk-adjusted yield (revenue less impairments as a percentage of average receivables) at 24% (FY18–20 average: 25.4%). Bridging receivables are assumed to reach £80m in the current fiscal year followed by £97m as the business is expanded to a level where it makes a more significant contribution to the group.

Exhibit 14: Estimate summary

£000

FY22

FY23e

FY24e

% change FY23

% change FY24

Number of new motor loans

19,747

22,500

22,800

13.9

1.3

Motor finance receivables at period end

259,036

286,035

301,940

10.4

5.6

Bridging loans at period end

63,879

80,000

97,000

25.2

21.3

Total customer receivables

322,915

366,035

398,940

13.4

9.0

Revenue

Motor finance

78,898

83,090

89,875

5.3

8.2

Property bridging

8,991

12,465

15,885

38.6

27.4

Total

87,889

95,555

105,760

8.7

10.7

Impairments

Motor finance

(3,805)

(15,382)

(18,203)

304.3

18.3

Property bridging

(315)

(997)

(1,589)

216.6

59.3

Total

(4,120)

(16,379)

(19,791)

297.6

20.8

Other cost of sales

(18,771)

(21,682)

(22,492)

15.5

3.7

Administration expenses

(13,679)

(13,187)

(14,595)

-3.6

10.7

EBITDA

51,319

44,307

48,882

-13.7

10.3

Depreciation

(529)

(482)

(449)

-8.9

-6.8

Operating profit / loss

50,790

43,825

48,433

-13.7

10.5

Finance expense

(3,772)

(4,535)

(5,750)

20.2

26.8

Pre-tax profit

47,018

39,290

42,683

-16.4

8.6

Tax

(9,036)

(7,465)

(10,254)

-17.4

37.4

Net profit

37,982

31,825

32,428

-16.2

1.9

EPS fully diluted (p)

312.7

262.0

267.0

-16.2

1.9

Dividend per share (p)

126.0

130.0

133.0

3.2

2.3

Source: Edison Investment Research

The segmental cash flow analysis below highlights the major turnaround in cash flow at Advantage between FY20 and FY21 as growth was replaced by contraction. The pattern was as expected, with the slowdown in advances outpacing the reduction in collections as payment holidays and forbearance took effect. In FY22 advances increased substantially but were still outpaced by very strong collections. Debt recovery was also stronger, contributing to an inflow of £14m compared with £32m in FY21.

Exhibit 15: Segmental cash flow analysis

£m

FY20

FY21

FY22

Comments

Motor Finance

Advances

(149.0)

(102.6)

(140.9)

Recovery in advances with a return to normal levels at year end

Monthly collections

148.1

138.5

152.7

Improved customer repayments and lower bad debt attrition

Settlements/reloans

30.2

28.0

34.1

Debt recovery

18.3

13.8

17.1

Repossessions normalise

Overheads/interest

(34.8)

(27.2)

(30.6)

Corporation tax

(6.3)

(6.2)

(8.3)

Dividend

(12.6)

(12.7)

(10.0)

Motor Finance (outflow)/inflow

(6.1)

31.6

14.1

Collections still outpace advances

Property bridging

Gross advances

(31.3)

(43.5)

(111.6)

Includes £43.0m CBILS bridging and £68.6m bridging

Retention collections

3.3

5.2

13.3

Collections

16.6

15.2

65.7

Also boosted by early CBILS repayments

Debt recovery

12.4

13.6

11.4

Overheads/interest

(2.6)

(2.8)

(5.3)

Corporation tax

(0.2)

(0.2)

(0.4)

Property bridging (outflow)/inflow

(1.8)

(12.5)

(26.9)

Other (outflow)/inflow

(1.9)

(0.1)

(2.0)

Group (outflow)/inflow

(9.8)

19.0

(14.8)

Opening net debt

108.0

117.8

98.8

Closing net debt

117.8

98.8

113.6

Source: S&U, Edison Investment Research. Note: Net debt is shown excluding lease liability.

Aspen property bridging expanded with sharply higher advances augmented by CBILS lending in FY22. Collections were also strong leaving the net outflow at £27m compared with £13m. At the group level this left an outflow of £15m compared with the inflow of £19m in FY21. Net debt increased to £114m and net debt/equity was 55%. With debt facilities available of £180m there is headroom to finance expected growth. On our estimates, net debt could rise to c £156m by end FY24 with net debt/equity at 65%.

Valuation

P/E comparisons with peers remain difficult to interpret given the impact of forward-looking provisions in the post-COVID-19 period, so we continue to frame valuation using our ROE/COE calculations. If we assume a cost of equity (COE) of 10% and long-term growth of 2%, then the share price at the time of writing (2,390p) would be consistent with an ROE of 13.2%, which is below our estimates for FY23 (14.8%) and FY24 (14%). Arguably, even that year might not reflect a full recovery from the impact of COVID-19 with our assumed transaction levels at Advantage still below prior levels and scope for Aspen to expand further. Historically, S&U has achieved higher returns on equity (the five-year average for the period FY16–20 is 16.3%). As noted on the first page, the prospective earnings multiple is just over 9x and the yield above 5%.

Exhibit 16: 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.

Contact details

Revenue by geography

S&U, 2 Stratford Court
Cranmore Boulevard, Solihull.
B90 4QT
0121 705 77 77
www.suplc.co.uk

Contact details

S&U, 2 Stratford Court
Cranmore Boulevard, Solihull.
B90 4QT
0121 705 77 77
www.suplc.co.uk

Revenue by geography

Management team

Chairman: Anthony Coombs

Deputy chairman: Graham Coombs

Anthony Coombs joined S&U in 1975 and was appointed managing director in 1999 and chairman in 2008. Between 1987 and 1997 he served as an MP. He is on the executive of the Consumer Credit Association and is a director of a number of companies and charities including the National Institute for Conductive Education.

Graham Coombs joined S&U after graduating from the London Business School in 1976. He is responsible for strategic matters.

Group finance director: Chris Redford

MD, Advantage Finance: Graham Wheeler

Chris Redford is a chartered accountant with over 10 years’ business experience in the fast-moving consumer goods, food and travel sectors. He was appointed as finance director of Advantage Finance in 1999 and as group finance director from 1 March 2004.

Graham Wheeler has over 35 years’ experience in motor finance across consumer and business lending, much of it in senior leadership roles. He developed through blue-chip companies like GM, GE Capital and Volkswagen FS, where he held the post of UK CEO for 11 years. Graham joined the S&U Plc board in September 2020 after a year leading its subsidiary Advantage Finance.

Management team

Chairman: Anthony Coombs

Anthony Coombs joined S&U in 1975 and was appointed managing director in 1999 and chairman in 2008. Between 1987 and 1997 he served as an MP. He is on the executive of the Consumer Credit Association and is a director of a number of companies and charities including the National Institute for Conductive Education.

Deputy chairman: Graham Coombs

Graham Coombs joined S&U after graduating from the London Business School in 1976. He is responsible for strategic matters.

Group finance director: Chris Redford

Chris Redford is a chartered accountant with over 10 years’ business experience in the fast-moving consumer goods, food and travel sectors. He was appointed as finance director of Advantage Finance in 1999 and as group finance director from 1 March 2004.

MD, Advantage Finance: Graham Wheeler

Graham Wheeler has over 35 years’ experience in motor finance across consumer and business lending, much of it in senior leadership roles. He developed through blue-chip companies like GM, GE Capital and Volkswagen FS, where he held the post of UK CEO for 11 years. Graham joined the S&U Plc board in September 2020 after a year leading its subsidiary Advantage Finance.

Principal shareholders

(%)

Wiseheights

19.93

JE Coombs

13.81

GDC Coombs

13.47

AMV Coombs

10.52

JS Coombs

3.80

M Cole-Fontayne

3.29

Grevayne (controlled by A Coombs and G Coombs)

2.62

Renta 4 Banco

2.39

S Coombs

2.33

F Coombs

2.33

Hargreaves Lansdown Asset Management

1.89


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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

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.

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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.

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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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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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