S&U — Looking towards a resumption of growth

S&U (LSE: SUS)

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Research: Financials

S&U — Looking towards a resumption of growth

The typical 52-month original term of S&U’s Advantage motor finance loans means that it takes time for the benefit of tighter credit criteria to flow through fully and there is also a time lag before a revival in loan growth is reflected in earnings; however, both are now in prospect. Aspen property bridging is also at a point where growth may accelerate, subject to market conditions. Taken together, we estimate this could allow the group to regain revenue and profit levels approaching those of FY20 by FY23.

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Financials

S & U

Looking towards a resumption of growth

December trading update

Financial services

14 December 2020

Price

1,930p

Market cap

£234m

Debt (£m) December 2020

103

Shares in issue

12.1m

Free float

73%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.2

13.5

(8.1)

Rel (local)

6.5

3.8

0.0

52-week high/low

2,500p

1,430p

Business description

S&U’s Advantage motor finance business lends on a simple hire-purchase basis to lower- and middle-income groups who may have impaired credit records that restrict their access to mainstream products. It has c 63,000 customers. The Aspen property bridging business has been developing, following its launch in early 2017.

Next events

FY21 trading update

11 February 2021

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

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

The typical 52-month original term of S&U’s Advantage motor finance loans means that it takes time for the benefit of tighter credit criteria to flow through fully and there is also a time lag before a revival in loan growth is reflected in earnings; however, both are now in prospect. Aspen property bridging is also at a point where growth may accelerate, subject to market conditions. Taken together, we estimate this could allow the group to regain revenue and profit levels approaching those of FY20 by FY23.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/20

89.9

35.1

239.4

120.0

8.1

6.2

01/21e

81.5

18.4

122.9

90.0

15.7

4.7

01/22e

82.9

24.9

165.9

100.0

11.6

5.2

01/23e

91.5

31.2

208.0

110.0

9.3

5.7

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

Trading update

S&U’s December 2020 update covers the period from 1 August to 8 December. At Advantage motor finance the rate of transactions improved in the period, but growth has been tempered by temporarily avoiding self-employed and higher-risk lending. This and still strong repayment levels mean that net receivables were slightly lower than we would have expected at this stage (£253m versus our previous estimate of £261m for the January year-end). Collection rates in the period were up from Q221 at 87.5% compared with 74.1% in Q121 and 94% in the prior year. Customers on payment holidays are now below 5,000 (out of c 63,000 customers in total). Early repayments from new customers are also reported to be performing well (historically a good indicator for future credit performance). The number of transactions at Aspen property bridging has improved considerably with net receivables ahead of our estimate at £29.6m (our year-end estimate was £26m) and S&U reports strengthened loan quality with no defaults outstanding.

Background and outlook

The group acknowledges the uncertainties of navigating the path out of COVID-19 restrictions and their aftermath but is looking for a resumption of its normal growth rates in H122. Given the recovery of demand for Advantage and Aspen since the initial lockdown this seems plausible. Our estimates allow for this improvement in growth and are only slightly changed for FY21 and FY22. We have introduced an estimate for FY23 to illustrate the result of the increased levels of lending assumed and, to a lesser extent, an improved cost of risk.

Valuation

The shares trade on a price to book value multiple of 1.3x which (using a ROE/COE model) implies the assumption of a return on equity of 12.7% which is above the 10.9% we estimate for FY22 but just below our estimate for FY23 and still well below historical levels of over 16%.

Further points from the update

Payment holidays and updated FCA guidance

At the end of July Advantage had 12,900 customers on payment holidays and this had reduced to 6,500 by the time of the H121 announcement at the end of September. Subsequently this has fallen further to less than 5,000. The FCA has issued updated payment deferral guidance which applied from 25 November and extends the time frame for potential deferrals to 31 July 2021 or a maximum of six months. While there is therefore potential for further payment holidays for Advantage customers experiencing difficulties related to COVID-19, it may be the case that those most likely to be affected have already opted for payment deferral where appropriate.

Preparing for recovery at Advantage

As reported previously, Advantage is taking the opportunity of the COVID-19 hiatus to work on operational improvements that should help as activity levels return to more normal levels. These include enhancing IT connections with introducers, further customer service and affordability analysis and developing affinity relationships with lenders which it is hoped will enable the acquisition of better-quality business at a lower cost.

Cash flow and funding

S&U reported that group borrowings stood at £103m compared with £108m in July and borrowing facilities of £130m. The debt position reflects significant cash generation by Advantage since the half year end offset by investment in Aspen of £10.6m and payment of the interim dividend (c £2.7m). Gearing (net debt/equity) stood at 58% leaving considerable headroom for lending growth.

Background and outlook

This section provides updates on some of the indicators we monitor when assessing trends in the markets for the Advantage and Aspen businesses.

We start with forecasts for UK GDP and unemployment as collected by the UK Treasury. GDP forecasts for both years are lower than they were in September reflecting further tightening of anti-COVID-19 measures while unemployment figures are lower for end 2020 but higher for end 2021 as job protection measures have been extended through to next spring. For Advantage, a key potential sensitivity is unemployment, so the forecasts suggest some risk of a deferral of adverse impact into the next calendar year. However, as noted earlier, it may be the case that customers most exposed to the adverse impact of the pandemic have already become evident, with prudent levels of provisioning already being made.

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

%

Average

Average of new forecasts

Low

High

GDP growth

2020

(10.6)

(11.0)

(12.4)

(8.9)

2021

5.3

4.8

0.7

7.6

Labour Force Survey unemployment rate Q4

2020

6.4

6.1

4.5

9.1

2021

7.2

7.2

5.0

9.6

Source: HM Treasury

Exhibit 2 shows that the recent tightening of restrictions has affected consumer confidence which has moved back towards its earlier post-pandemic low point. Prospectively, weathering the high-risk winter period from a public health perspective and the build-up of the vaccination programme should have a positive effect on confidence. Exhibit 3 shows that the unemployment rate has started to move up although it is a lagging indicator and is still being cushioned by government job protection measures. Redundancies, however, have shown a substantial increase, as feared. Both indicators seem likely to worsen before easing given the economic forecasts shown above.

Exhibit 2: GFK UK consumer confidence indicator

Exhibit 3: UK redundancies and unemployment

Source: Bloomberg (last value November 2020)

Source: Bloomberg (last value September 2020)

Exhibit 2: GFK UK consumer confidence indicator

Source: Bloomberg (last value November 2020)

Exhibit 3: UK redundancies and unemployment

Source: Bloomberg (last value September 2020)

Next are data on used car transactions and used car finance. Exhibit 4 shows the sharp drop in used car transactions in CY20 when compared with the monthly figures for the prior two years. The striking point here is how well volume has recovered since the initial lockdown. Exhibit 5 tells a similar story for used car finance, in line with S&U’s comments about recent demand.

Exhibit 4: Used car transactions 2018, 2019 and 2020

Exhibit 5: Used car finance through dealerships

Source: SMMT, Edison Investment Research

Source: Finance and Leasing Association. Note: By volume.

Exhibit 4: Used car transactions 2018, 2019 and 2020

Source: SMMT, Edison Investment Research

Exhibit 5: Used car finance through dealerships

Source: Finance and Leasing Association. Note: By volume.

As far as used car prices are concerned, these have been buoyant in 2020 with strong consumer demand and reduced supply pushing prices up with the Autotrader retail price index showing like-for-like increases of over 7% y-o-y in the three months to November. However, auctioneers Aston Barclay, for example, suggest some normalisation is underway in the market as supply increases. Prospectively, 2021 could see some further weakening if repossessions and voluntary terminations rise significantly. Nevertheless, Advantage’s exposure to lower auction prices on repossessions is limited by the relatively low value of the vehicles it finances (average loan in H121: £6,500).

Turning to Aspen property bridging, Exhibit 6 shows the number of UK non-residential and residential transactions with residential being most relevant for Aspen. Both have seen an extended post lockdown bounce with a stronger move evident for residential transactions. While these figures show the broad market background for transactions, as a small business Aspen should have significant scope for expansion as it is now more established in the market and has gained experience having lent more than £100m since it was founded.

Exhibit 6: UK property transactions (seasonally adjusted)

Source: HM Revenue & Customs. Note: Figures for August to October 2020 are provisional

Changes in estimates

Changes in our revenue and earnings estimates for FY21 and FY22 are modest (Exhibit 7). For FY21 these partly reflect the level of receivables for Advantage and Aspen indicated in the update. For FY22 we have allowed for slightly higher revenue and impairments to reflect non-performing debt remaining on the books in the wake of the pandemic’s impact this year. We have also changed our dividend estimates on the assumption that the board may take into account prospective dividend cover rather than sticking rigidly to a twice covered dividend; on our estimates cover would increase from 1.4x to 1.9x from FY21 to FY23.

Exhibit 7: 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 (%)

2021e

82.0

81.5

-0.6%

18.6

18.4

-1.1%

124.3

122.9

-1.1%

62.0

90.0

45.2%

2022e

80.5

82.9

3.0%

24.8

24.9

0.1%

165.7

165.9

0.1%

83.0

100.0

20.5%

2023e

91.5

31.2

208.0

110.0

Source: Edison Investment Research

Exhibit 8 provides a summary of key elements of our forecasts including our newly introduced forecast for FY23. While the latter forecast is tentative, it is based on broadly stable underlying ratios for risk-adjusted yield and the increases in loan books set out at the top of the table. Motor finance transactions are expected to return close to their FY20 level in FY23. Given that Aspen property bridging is still at a relatively small scale we have allowed for a step up in the size of the book; however, we note that if the performance of this lending were to disappoint then management has indicated a conservative approach would be taken. Similarly, if market conditions for Advantage were to prove less favourable then the pace of lending would be likely to be more moderate.

Exhibit 8: Estimate summary

Year-end January (£000)

FY20

FY21e

FY22e

FY23e

Number of new motor loans

23,334

16,911

22,300

23,150

Motor finance receivables at period end

280,757

250,790

266,813

282,935

Bridging receivables at period end

20,993

30,500

57,000

105,000

Revenue

Motor finance

85,465

77,827

75,988

78,715

Property bridging

4,474

3,659

6,949

12,835

Total

89,939

81,486

82,937

91,550

Impairments

Motor finance

(16,507)

(32,361)

(21,639)

(18,498)

Property bridging

(713)

(630)

(1,112)

(2,054)

Total

(17,220)

(32,991)

(22,751)

(20,552)

Other cost of sales

(19,872)

(14,761)

(19,311)

(20,960)

Administration expenses

(12,413)

(10,867)

(11,322)

(12,817)

EBITDA

40,434

22,866

29,553

37,221

Depreciation

(450)

(561)

(565)

(500)

Operating profit / loss

39,984

22,305

28,988

36,722

Finance expense

(4,850)

(3,861)

(4,131)

(5,562)

Pre-tax profit

35,134

18,444

24,857

31,160

Tax

(6,252)

(3,531)

(4,723)

(5,920)

Net profit

28,882

14,913

20,134

25,239

EPS fully diluted (p)

239.4

122.9

165.9

208.0

Dividend per share (p)

120.0

90.0

100.0

110.0

Source: Company accounts, Edison Investment Research

Valuation

As we discussed in our last note in October, P/E comparisons with peers are difficult to interpret given the impact of forward-looking provisions in the post-COVID-19 period so for the moment we simply update our ROE/COE calculations. If we assume a cost of equity of 10% and long-term growth of 2% then the share price at the time of writing (1,930p) would be consistent with an ROE of 12.7%, which is above the 10.9% we estimate for FY22 but just below the 12.9% implied by our new estimate for FY23. Arguably, even that year might not reflect a full recovery from the impact of COVID-19 and historically S&U has achieved higher returns on equity (the historical five-year average is over 16%).


Exhibit 9: Financial summary

£'000s

2017

2018

2019

2020

2021e

2022e

2023e

Year end 31 January

PROFIT & LOSS

Revenue

 

 

60,521

79,781

82,970

89,939

81,486

82,937

91,550

Impairments

(12,194)

(19,596)

(16,941)

(17,220)

(32,991)

(22,751)

(20,552)

Other cost of sales

(12,871)

(17,284)

(15,751)

(19,872)

(14,761)

(19,311)

(20,960)

Administration expenses

(8,332)

(9,629)

(10,763)

(12,413)

(10,867)

(11,322)

(12,817)

EBITDA

 

 

27,124

33,272

39,515

40,434

22,866

29,553

37,221

Depreciation

 

 

(253)

(294)

(414)

(450)

(561)

(565)

(500)

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

 

 

26,871

32,978

39,101

39,984

22,305

28,988

36,722

Exceptionals

0

0

0

0

0

0

0

Non recurring items

0

0

0

0

0

0

0

Investment revenues / finance expense

(1,668)

(2,818)

(4,541)

(4,850)

(3,861)

(4,131)

(5,562)

Profit before tax

 

 

25,203

30,160

34,560

35,134

18,444

24,857

31,160

Tax

(4,861)

(5,746)

(6,571)

(6,252)

(3,531)

(4,723)

(5,920)

Profit after tax

 

 

20,342

24,414

27,989

28,882

14,913

20,134

25,239

Average Number of Shares Outstanding (m)

12.0

12.1

12.1

12.1

12.1

12.1

12.1

Diluted EPS (p)

 

 

169.1

202.4

232.0

239.4

122.9

165.9

208.0

EPS - basic (p)

 

 

170.7

203.8

233.2

239.6

123.0

166.1

208.2

Dividend per share (p)

91.0

105.0

118.0

120.0

90.0

100.0

110.0

EBITDA margin (%)

44.8%

41.7%

47.6%

45.0%

28.1%

35.6%

40.7%

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

44.4%

41.3%

47.1%

44.5%

27.4%

35.0%

40.1%

Return on equity

15.2%

16.7%

17.6%

16.8%

8.3%

10.9%

12.9%

BALANCE SHEET

Non-current assets

 

 

138,004

181,015

185,383

197,806

187,617

215,255

257,156

Current assets

 

 

57,763

84,178

95,430

108,275

98,637

113,320

135,654

Total assets

 

 

195,767

265,193

280,813

306,081

286,254

328,574

392,810

Current liabilities

 

 

(17,850)

(7,927)

(6,722)

(7,424)

(3,544)

(3,809)

(4,127)

Non current liabilities inc pref

(38,450)

(104,450)

(108,724)

(119,183)

(101,397)

(135,111)

(185,825)

Net assets

 

 

139,467

152,816

165,367

179,474

181,313

189,654

202,858

NAV per share (p)

1,177

1,276

1,375

1,493

1,508

1,577

1,687

CASH FLOW

Operating cash flow

 

 

(27,431)

(43,418)

10,530

4,946

31,650

(21,668)

(38,214)

Net cash from investing activities

(308)

(1,040)

(785)

(265)

(1,106)

(250)

(250)

Dividends paid

(9,548)

(11,377)

(13,080)

(14,461)

(13,104)

(11,883)

(12,125)

Other financing (excluding change in borrowing)

21

12

14

14

2

0

0

Net cash flow

 

 

(37,266)

(55,823)

(3,321)

(9,766)

17,442

(33,801)

(50,589)

Source: S&U accounts, Edison Investment Research


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This report has been commissioned by S&U and prepared and issued by Edison, in consideration of a fee payable by S&U. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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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 £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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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

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