S&U — Planning for a significant rebound

S&U (LSE: SUS)

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GBP12.65

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Research: Financials

S&U — Planning for a significant rebound

Lockdowns have held back the level of S&U’s motor finance transactions and receivables, but property bridging has seen a stronger end to the year than expected. Both businesses report strong demand and for motor finance the benefits of tighter credit criteria and a prospective recovery in lending volumes should become progressively more apparent during FY22 and FY23.

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Financials

S&U

Planning for a significant rebound

Q421 trading update

Financial services

15 February 2021

Price

2,280p

Market cap

£276m

Debt at end January 2021 (£m)

99

Shares in issue

12.1m

Free float

73%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.7

30.3

(2.6)

Rel (local)

4.4

23.9

8.8

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 results

30 March 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

Lockdowns have held back the level of S&U’s motor finance transactions and receivables, but property bridging has seen a stronger end to the year than expected. Both businesses report strong demand and for motor finance the benefits of tighter credit criteria and a prospective recovery in lending volumes should become progressively more apparent during FY22 and 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

9.5

5.3

01/21e

82.0

18.4

122.7

90.0

18.6

3.9

01/22e

82.0

23.8

158.9

100.0

14.3

4.4

01/23e

92.9

31.4

209.9

110.0

10.9

4.8

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

FY21 year-end update

S&U’s year-end update covers the period from the 9 December update to the end of January. Advantage motor finance has continued to see strong demand with record loan application numbers. Prudent underwriting criteria meant that the H221 level of new transactions was similar to H121 giving a total for the year of c 15,600, compared with the pre-COVID-19 level of 23,300 for FY20. In the last two months of the year transactions were on a rising trend and reached nearly 80% of the prior year period. Collections remain strong; January saw 90% of contractual payments made and customers on payment holiday are down to below 4,000 from a peak of 15,000. Year-end net receivables stood at £247m compared with £250m in December and £281m at end FY20. Aspen property bridging is making strong progress, benefiting from a resilient residential market and the growing experience and reputation of the business. Net receivables at Aspen stood at £34m compared with £29.6m in December and £21m at end FY20. New transactions have been ahead of budget and the pipeline has more than doubled. Credit quality is good with only three of 60 customers slightly beyond term at end-January. Experienced new staff have been added to support growth. Reflecting confidence in the outlook, a second interim dividend of 25p (FY20: 36p) is to be paid giving a total to date of 47p (70p).

Looking for a significant rebound in motor finance

Looking ahead, the group is planning for a strong rebound in motor finance transaction volume once lockdown restrictions ease and also a substantial increase in Aspen lending. Given the bounce back seen in motor finance between lockdowns and the resilience of the residential property market thus far, this seems a reasonable expectation, although there are clearly still uncertainties over the timing of improvements. Changes in our estimates are modest (see Exhibit 7).

Valuation

The shares trade on a price to book ratio of 1.6x, implying a return on equity (ROE) of 14.6%, above our estimate of 13% for FY23, but below the historical five-year average of over 16%.

Background and outlook

As in previous notes, this section provides updates on some of the indicators we monitor when assessing trends in the markets for the Advantage and Aspen businesses.

Exhibit 1 shows forecasts for UK GDP and unemployment as collected by the UK Treasury. Focusing on 2021, GDP forecasts are lower than they were when compared with the November figures included in our last note, with the low estimate switching from a small positive to a contraction. On the other hand, the unemployment forecasts are slightly lower than in November, perhaps supported by an expectation that a successful vaccination programme will minimise further restrictions by the end of calendar 2021, bolstering business confidence and hence job retention. For Advantage, a key sensitivity is unemployment, so any potential softening in the peak level of unemployment against earlier expectations could be helpful (subject to the actual incidence of unemployment in the customer base).

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

%

Average

Average of new forecasts

Low

High

GDP growth

2020

-10.7

-10.6

-11.4

-10.0

2021

4.5

4.4

-3.0

6.1

Labour Force Survey unemployment rate Q4

2020

5.6

5.3

4.6

7.1

2021

6.7

6.4

4.6

8.0

Source: HM Treasury

Exhibit 2 shows that, unsurprisingly, consumer confidence has remained at relatively low levels during the current lockdown. Prospectively, positive trends in infections and related data with 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 have shown a substantial increase but may subside quite rapidly once economic recovery is underway. Unemployment is 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 November 2020)

Exhibit 2: GfK UK consumer confidence indicator

Source: Bloomberg (last value November 2020)

Exhibit 3: UK redundancies and unemployment

Source: Bloomberg (last value November 2020)

Next are data on used car transactions and used car finance. Exhibit 4 shows the sharp drop in used car transactions in the first half of calendar 2020 when compared with the monthly figures for the prior two years. The striking point here is how well volume recovered following the initial lockdown, albeit with a dip in Q4 coinciding with the second lockdown. Exhibit 5 tells a similar story for used car finance.

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 and early 2021 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 six months to February. However, auctioneers Aston Barclay, for example, have previously suggested some normalisation in the market as supply increases. Prospectively, 2021 could see some further weakening if repossessions rise significantly.1 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).

  On this front the FCA has guided that consumer credit firms can repossess goods and vehicles from end January 2021 but only as a last resort and where appropriate. The FCA notes that given depreciation of a good or vehicle some customers could end up owing more in the longer term if repossessions were prevented.

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 October to December 2020 are provisional.


Changes in estimates

Changes in our estimates are modest (Exhibit 7). For FY22 the reduction mainly reflects a lower than expected level of receivables at the start of the year and an expectation that first half transaction numbers will be more subdued than previously assumed because of the current lockdown. For FY23 we have allowed for a marginally stronger bounce back. Assumed revenue for Aspen is slightly higher than our previous forecast, reflecting the positive commentary in the update.

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 (%)

FY21e

81.5

82.0

0.6%

18.4

18.4

-0.2%

122.9

122.7

-0.2%

90.0

90.0

0.0%

FY22e

82.9

82.0

-1.1%

24.9

23.8

-4.2%

165.9

158.9

-4.2%

100.0

100.0

0.0%

FY23e

91.5

92.9

1.5%

31.2

31.4

0.9%

208.0

209.9

0.9%

110.0

110.0

0.0%

Source: Edison Investment Research

Exhibit 8 provides a summary of key elements of our forecasts. Sensitivities to acknowledge include the point that delays in lockdown easing could result in a lower level of transactions for Advantage and a lower average loan book than we have assumed. This could also have some effect on profit recognition in FY23. At Aspen we have assumed a significant step up in loan book for FY22 and FY23, which may not be realised if market conditions mean that the new business available becomes less attractive.

Exhibit 8: Estimate summary

Year-end January (£000)

FY20

FY21e

FY22e

FY23e

Number of new motor loans

23,334

15,600

21,500

23,100

Motor finance receivables at period end

280,757

246,604

267,320

290,750

Bridging receivables at period end

20,993

34,000

60,000

100,000

Revenue

Motor finance

85,465

78,166

74,592

79,770

Property bridging

4,474

3,804

7,395

13,175

Total

89,939

81,970

81,987

92,945

Impairments

Motor finance

(16,507)

(33,572)

(21,731)

(19,384)

Property bridging

(713)

(653)

(1,183)

(2,108)

Total

(17,220)

(34,225)

(22,914)

(21,492)

Other cost of sales

(19,872)

(13,979)

(19,428)

(20,968)

Administration expenses

(12,413)

(10,935)

(11,192)

(12,734)

EBITDA

40,434

22,830

28,453

37,752

Depreciation

(450)

(561)

(565)

(500)

Operating profit / loss

39,984

22,269

27,888

37,252

Finance expense

(4,850)

(3,861)

(4,086)

(5,805)

Pre-tax profit

35,134

18,408

23,802

31,447

Tax

(6,252)

(3,524)

(4,522)

(5,975)

Net profit

28,882

14,884

19,280

25,472

EPS fully diluted (p)

239.4

122.7

158.9

209.9

Dividend per share (p)

120.0

90.0

100.0

110.0

Source: Company accounts, Edison Investment Research

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 a valuation using 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 (2,280p) would be consistent with an ROE of 14.6%, above the 10.4% and 13.0% we estimate for FY22 and FY23 respectively. Arguably, our FY23 estimate 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

81,970

81,987

92,945

Impairments

(12,194)

(19,596)

(16,941)

(17,220)

(34,225)

(22,914)

(21,492)

Other cost of sales

(12,871)

(17,284)

(15,751)

(19,872)

(13,979)

(19,428)

(20,968)

Administration expenses

(8,332)

(9,629)

(10,763)

(12,413)

(10,935)

(11,192)

(12,734)

EBITDA

 

 

27,124

33,272

39,515

40,434

22,830

28,453

37,752

Depreciation

 

 

(253)

(294)

(414)

(450)

(561)

(565)

(500)

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

 

 

26,871

32,978

39,101

39,984

22,269

27,888

37,252

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)

(4,086)

(5,805)

Profit before tax

 

 

25,203

30,160

34,560

35,134

18,408

23,802

31,447

Tax

(4,861)

(5,746)

(6,571)

(6,252)

(3,524)

(4,522)

(5,975)

Profit after tax

 

 

20,342

24,414

27,989

28,882

14,884

19,280

25,472

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

122.7

158.9

209.9

EPS - basic (p)

 

 

170.7

203.8

233.2

239.6

122.8

159.0

210.1

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%

27.9%

34.7%

40.6%

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

44.4%

41.3%

47.1%

44.5%

27.2%

34.0%

40.1%

Return on equity

15.2%

16.7%

17.6%

16.8%

8.3%

10.4%

13.0%

BALANCE SHEET

Non-current assets

 

 

138,004

181,015

185,383

197,806

187,166

217,560

259,007

Current assets

 

 

57,763

84,178

95,430

108,275

99,092

115,110

137,206

Total assets

 

 

195,767

265,193

280,813

306,081

286,257

332,670

396,212

Current liabilities

 

 

(17,850)

(7,927)

(6,722)

(7,424)

(3,576)

(3,788)

(4,180)

Non current liabilities inc pref

(38,450)

(104,450)

(108,724)

(119,183)

(101,397)

(140,111)

(189,825)

Net assets

 

 

139,467

152,816

165,367

179,474

181,284

188,771

202,207

NAV per share (p)

1,177

1,276

1,375

1,493

1,508

1,570

1,682

CASH FLOW

Operating cash flow

 

 

(27,431)

(43,418)

10,530

4,946

32,315

(26,729)

(37,271)

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)

18,107

(38,861)

(49,646)

Source: S&U accounts, Edison Investment Research


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.

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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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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.

Copyright: Copyright 2021 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.

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.

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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.

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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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Ebiquity — Activity levels recovering

Ebiquity’s pre-close trading update indicates recovery as expected in H220, from both a pick-up in demand from existing clients and a good performance in winning new business. The group therefore returned to profit in the second half, leaving it with a small adjusted operating loss for the full year, slightly below our earlier estimate of a small profit. The performance on net debt was better than our modelling, with the group ending the year with net debt of £7.7m (Edison estimate £8.8m). Ebiquity’s share price has not kept pace with those of the UK-based agencies since our November Outlook report, exaggerating the rating differential.

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