Last close As at 05/08/2026
GBP19.60
▲ 20.00 (1.03%)
Market capitalisation
GBP239m
Research: Financials
S&U’s latest trading update indicates it is on track to deliver results close to expectations for the current year. Motor finance receivables growth slowed in the second half, which prompted a reduction in our estimates, primarily for FY20. We still look for a return on equity (ROE) of above 17% and believe the discipline shown in holding to pricing and credit criteria at Advantage is a positive sign for investors. Our expectations for Aspen Property Bridging are unchanged and it should provide a valuable diversifying contribution to profits.
Written by
S&U |
Trading broadly in line |
December trading update |
Financial services |
10 December 2018 |
Share price performance
Business description
Next events
Analysts
S&U is a research client of Edison Investment Research Limited |
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S&U’s latest trading update indicates it is on track to deliver results close to expectations for the current year. Motor finance receivables growth slowed in the second half, which prompted a reduction in our estimates, primarily for FY20. We still look for a return on equity (ROE) of above 17% and believe the discipline shown in holding to pricing and credit criteria at Advantage is a positive sign for investors. Our expectations for Aspen Property Bridging are unchanged and it should provide a valuable diversifying contribution to profits.
Year end |
Revenue (£m) |
PBT |
EPS |
DPS |
P/E |
Yield |
01/17 |
60.5 |
25.2 |
169.1 |
91.0 |
12.7 |
4.2 |
01/18 |
79.8 |
30.2 |
202.4 |
105.0 |
10.6 |
4.9 |
01/19e |
91.1 |
34.5 |
231.4 |
118.0 |
9.3 |
5.5 |
01/20e |
100.1 |
38.3 |
256.6 |
130.5 |
8.4 |
6.1 |
Note: PBT and EPS are reported.
Trading update signals in line for FY19
S&U’s December trading update indicates it is trading broadly in line with expectations for the current year. The used car finance market has been resilient but S&U reports a slight reduction in loan applications and an increase in competitive pressure for Advantage (something that has been seen previously on occasion). This, and tighter credit criteria, has meant the number of new loans year to date is down 7% versus last year. Growth in the loan book has therefore slowed noticeably (receivables stand at £267m vs £263.5m end-July). As expected, the risk-adjusted yield has fallen slightly since July at 25.0% vs 25.4%, reflecting the worse than expected quality of some loans taken on last year. Positively, cash collections from newer customers indicate moves to increase credit quality are paying off. The Aspen property bridging finance business, no longer a pilot project, continues to make progress and is looking to expand its loan book to c £30m during calendar year 2019.
Background and outlook: Tempering FY20e growth
Advantage’s in-house expertise in customising credit rating metrics facilitates refinement of credit criteria and its experience in adjusting to changing markets is evident in its discipline when competitors offer what it sees as unattractive terms to win business. This has reduced the growth in receivables and, with the reduced risk-adjusted yield, has led to a tempering in our estimates. For the current year this is only marginal (-1.5% for EPS) whereas for FY20e our assumption of lower receivables growth results in an 8% reduction in estimated EPS.
Valuation: Still looks conservative on lower estimates
S&U shares trade on an FY20 P/E multiple of below 9x on our revised estimates with a historical yield of nearly 5%. On a calendarised basis it trades close to peer average P/Es for this year and next and generates an above-average ROE while only commanding a slightly above average price to book multiple. Our ROE/COE valuation stands at 2,800p (previously 3,060p).
Car market trends and Aspen investment to increase
Industry data for the used-car market demonstrate its greater recent stability compared with the new car market (Exhibit 1 shows trends in SMMT data for registrations and used-car transactions). The number of point-of-sale car financing transactions has continued to grow but has also shown a disparity between new and used cars, with new car financing down 5% in the 12 months to end September compared with the rise of 8% for used cars. For September alone the number of used-car finance transactions was up 3%, suggesting some tapering in growth compared with compound annual growth of 10% between 2009 and 2017 (quarterly trend shown in Exhibit 2).
Within the used car market, Advantage addresses the lower to middle income segment with an average loan size of c £6,200, where vehicles are most commonly used for transport to work: features that tend to mitigate the risk of default and exposure to potential weakness in used car prices. Loans are straightforward hire-purchase contracts and Advantage does not offer personal purchase contract loans.
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Exhibit 1: UK car market trends (% change y-o-y) |
Exhibit 2: Used-car finance through dealerships |
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|
Source: SMMT |
Source: Finance and Leasing Association |
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Exhibit 1: UK car market trends (% change y-o-y) |
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Source: SMMT |
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Exhibit 2: Used-car finance through dealerships |
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Source: Finance and Leasing Association |
In November S&U announced it will develop its Aspen property bridging finance business beyond the pilot stage. The loan book is c £18m (£16.3m at the half year) and for 2019 investment will be increased to £30m, a significant step up but still small in the context of the market and the group.
The average loan size at Aspen is c £380,000, with an interest rate of just over 1% per month and an original term of between six and 12 months. In its trading update S&U noted that stepped loans have been popular and profitable. As an illustration, these may offer a lower interest rate over four months at 0.65%, followed by a step up to 1.25% for the balance of the period. Aspen loans are made for refurbishment rather than rebuilding (avoiding risks related to timing and collateral value). The business was in profit at the half year (£0.28m profit in the period to end July). Aspen expects a return on capital of around 12% and, while this is lower than the figure of c 15% earned by Advantage, it is still attractive taking into account the different characteristics of the businesses.
The business should provide a welcome diversification for the group and (subject to credit experience) further loan book growth from £30m to £50m could see it generating a pre-tax profit of c £5m.
Financials: Estimate changes
The main figures from our segmental forecasts are shown in Exhibit 3. We have not changed our estimates for bridging finance and the main change in motor finance, as noted earlier, is a lower rate of receivables growth assumed for both forecast years. The risk-adjusted yield is slightly lower than previously, but we still assume a small improvement in FY20 as the tightening of criteria progressively feeds into the loan book.
Exhibit 3: Segmental analysis
£000s |
2016 |
2017 |
2018 |
2019e |
2020e |
Motor |
|||||
Net accounts receivable |
145,141 |
193,529 |
251,215 |
268,724 |
296,268 |
Revenue |
45,182 |
60,521 |
78,882 |
88,239 |
95,427 |
Impairments |
(7,611) |
(12,194) |
(19,434) |
(23,012) |
(23,899) |
Ratios |
|||||
Net receivables growth |
36% |
33% |
30% |
7% |
10% |
Revenue as % avg receivables |
35.9% |
35.7% |
35.5% |
33.9% |
33.8% |
P&L loan loss provision as % revenue |
(16.8%) |
(20.1%) |
(24.6%) |
(26.1%) |
(25.0%) |
Risk adjusted yield on average receivables |
29.9% |
28.5% |
26.7% |
25.1% |
25.3% |
P&L loan loss provision as % avg receivables |
(6.1%) |
(7.2%) |
(8.7%) |
(8.9%) |
(8.5%) |
Bridging finance |
|||||
Net loans end of period |
10,841 |
20,000 |
30,000 |
||
Interest/fee revenue |
899 |
2,870 |
4,625 |
||
Loan loss provision |
(162) |
(241) |
(393) |
||
Ratios |
|||||
Interest/fee revenue % of average receivables |
24.9% |
18.1% |
18.5% |
||
P&L loan loss provision % ave receivables |
(4.5%) |
(1.5%) |
(1.6%) |
||
Group |
|||||
Accounts receivable |
145,141 |
193,529 |
262,056 |
288,724 |
326,268 |
Revenue |
45,182 |
60,521 |
79,781 |
91,109 |
100,052 |
Source: S&U, Edison Investment Research
The changes in the headline numbers of our estimates flowing from the revised segmental assumptions are summarised in Exhibit 4 and further details are included in Exhibit 6.
Exhibit 4: Changes to estimates
Year end |
Revenue (£m) |
PBT (£m) |
EPS (p) |
DPS (p) |
||||||||
January |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
2019e |
92.4 |
91.1 |
-1.4 |
35.0 |
34.5 |
-1.5 |
235.0 |
231.4 |
-1.5 |
118.0 |
118.0 |
0.0 |
2020e |
106.7 |
100.1 |
-6.2 |
41.8 |
38.3 |
-8.3 |
280.0 |
256.6 |
-8.3 |
140.0 |
130.5 |
-6.8 |
Source: Edison Investment Research
Valuation
We have updated our peer comparison table (Exhibit 5), which includes a number of companies involved in non-standard lending or have motor finance as one of their activities. S&U trades on calendar year 2018 and 2019 P/Es close to the averages and on an above-average yield. The ROE is above the group average, whereas the price-to-book is only modestly higher than average.
Although our estimates have been reduced, we still look for the ROE to move to more than 17% for FY19 and FY20. Factoring an assumed cost of equity of 10%, long-term growth of 4% (5% previously) and an ROE of 17% to a ROE/COE model would give a value of 2,800p (3,060p previously) .
Exhibit 5: Peer comparison
|
Price (p) |
Market cap (£m) |
P/E 2018 (x) |
P/E 2019 (x) |
Yield (%) |
ROE (%) |
P/BV (x) |
S&U |
2,150 |
257 |
9.4 |
8.4 |
5.5% |
16.7 |
1.7 |
1PM |
41 |
36 |
5.6 |
5.4 |
2.1% |
13.0 |
0.7 |
Close Brothers |
1,428 |
2,152 |
10.4 |
10.2 |
4.6% |
16.3 |
1.6 |
OneSavings Bank |
336 |
819 |
6.2 |
5.8 |
4.2% |
25.5 |
1.4 |
PCF Group |
36 |
77 |
16.3 |
10.8 |
1.1% |
10.3 |
1.8 |
Provident Financial |
608 |
1,533 |
11.9 |
9.4 |
1.8% |
14.0 |
2.3 |
Secure Trust Bank |
1,378 |
253 |
9.1 |
7.4 |
6.0% |
8.9 |
1.0 |
Average |
|
|
9.9 |
8.2 |
3.3% |
14.6 |
1.5 |
Source: Thomson Reuters, Edison Investment Research. Note: P/Es are adjusted to calendar years. Priced at 7 December 2018.
Exhibit 6: Financial summary
£'000s |
2016 |
2017 |
2018 |
2019e |
2020e |
||
Year end 31 January |
|||||||
PROFIT & LOSS |
|||||||
Revenue |
|
|
45,182 |
60,521 |
79,781 |
91,109 |
100,052 |
Impairments |
(7,611) |
(12,194) |
(19,596) |
(23,253) |
(24,292) |
||
Other cost of sales |
(8,980) |
(12,871) |
(17,284) |
(17,450) |
(19,310) |
||
Administration expenses |
(7,131) |
(8,332) |
(9,629) |
(11,066) |
(12,006) |
||
EBITDA |
|
|
21,460 |
27,124 |
33,272 |
39,340 |
44,444 |
Depreciation |
|
|
(209) |
(253) |
(294) |
(359) |
(399) |
Op. profit (incl. share-based payouts pre-except.) |
|
|
21,251 |
26,871 |
32,978 |
38,981 |
44,045 |
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Non recurring items |
0 |
0 |
0 |
0 |
0 |
||
Investment revenues / finance expense |
(1,782) |
(1,668) |
(2,818) |
(4,473) |
(5,769) |
||
Profit before tax (FRS 3) |
|
|
19,469 |
25,203 |
30,160 |
34,508 |
38,276 |
Profit before tax (norm) |
|
|
19,469 |
25,203 |
30,160 |
34,508 |
38,276 |
Tax |
(3,583) |
(4,861) |
(5,746) |
(6,556) |
(7,272) |
||
Discontinued business after tax |
53,299 |
||||||
Profit after tax (FRS 3) |
|
|
69,185 |
20,342 |
24,414 |
27,953 |
31,003 |
Profit after tax (norm) |
|
|
15,886 |
20,342 |
24,414 |
27,953 |
31,003 |
Average Number of Shares Outstanding (m) |
12.0 |
12.0 |
12.1 |
12.1 |
12.1 |
||
Diluted EPS (p) |
|
|
576.5 |
169.1 |
202.4 |
231.4 |
256.6 |
EPS - normalised (p) |
|
|
132.4 |
169.1 |
202.4 |
231.4 |
256.6 |
Dividend per share (p) |
201.0 |
91.0 |
105.0 |
118.0 |
130.5 |
||
EBITDA margin (%) |
47.5% |
44.8% |
41.7% |
43.2% |
44.4% |
||
Operating margin (before GW and except.) (%) |
47.0% |
44.4% |
41.3% |
42.8% |
44.0% |
||
Return on equity |
15.2% |
15.2% |
16.7% |
17.6% |
17.9% |
||
BALANCE SHEET |
|||||||
Non-current assets |
|
|
103,653 |
138,004 |
181,015 |
196,262 |
221,573 |
Current assets |
|
|
61,903 |
57,763 |
84,178 |
107,597 |
130,101 |
Total assets |
|
|
165,556 |
195,767 |
265,193 |
303,858 |
351,674 |
Current liabilities |
|
|
(6,850) |
(17,850) |
(7,927) |
(7,203) |
(7,488) |
Non-current liabilities inc pref |
(30,450) |
(38,450) |
(104,450) |
(131,202) |
(162,086) |
||
Net assets |
|
|
128,256 |
139,467 |
152,816 |
165,453 |
182,101 |
NAV per share (p) |
1,084 |
1,177 |
1,276 |
1,381 |
1,520 |
||
CASH FLOW |
|||||||
Operating cash flow |
|
|
(16,017) |
(27,431) |
(43,418) |
(998) |
(5,716) |
Net cash from investing activities |
80,716 |
(308) |
(1,040) |
(588) |
(588) |
||
Dividends paid |
(23,090) |
(9,548) |
(11,377) |
(13,084) |
(14,576) |
||
Other financing (excluding change in borrowing) |
55 |
21 |
12 |
(3) |
(16) |
||
Net cash flow |
|
|
41,664 |
(37,266) |
(55,823) |
(14,673) |
(20,896) |
Opening net (debt)/cash |
|
|
(53,565) |
(11,901) |
(49,167) |
(104,990) |
(119,663) |
Closing net (debt)/cash |
|
|
(11,901) |
(49,167) |
(104,990) |
(119,663) |
(140,559) |
Source: S&U Accounts, Edison Investment Research. Note: FY16 dividend per share includes exceptional payment of 125p.
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