S&U — Strong start to the year

S&U (LSE: SUS)

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Research: Financials

S&U — Strong start to the year

The expected April bounce in motor finance transactions did not quite meet Advantage’s expectations, but there was still an acceleration and credit quality on new loans has remained good. Aspen Bridging is seeing strong growth in receivables and is on track to make a material contribution to group profits.

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Financials

S&U

Strong start to the year

AGM update

Financial services

24 May 2021

Price

2,680p

Market cap

£327m

Debt (£m) at 19 May 2021

111

Shares in issue

12.1m

Free float

28%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.6

18.2

66.3

Rel (local)

6.8

11.4

37.5

52-week high/low

2,800p

1,475p

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

Q222 trading update

10 August 2021

H122 results

28 September 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 expected April bounce in motor finance transactions did not quite meet Advantage’s expectations, but there was still an acceleration and credit quality on new loans has remained good. Aspen Bridging is seeing strong growth in receivables and is on track to make a material contribution to group profits.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/20

89.9

35.1

239.4

120.0

11.2

4.5

01/21

83.8

18.1

120.7

90.0

22.2

3.4

01/22e

88.6

23.9

159.2

100.0

16.8

3.7

01/23e

94.5

31.8

211.9

110.0

12.6

4.1

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

AGM statement and update

S&U’s trading statement for the period from 1 February to 19 May indicated that the group is continuing a strong recovery as motor and housing markets revive. Profitability for both Advantage motor finance and Aspen property bridging were ahead of group projections in the period. Advantage saw a smaller than expected bounce in transactions in April following the opening of dealerships, but advances have accelerated with good new business loan quality. Monthly collections are above budget. Customers on payment holidays are down to 1,200 (out of a cumulative total of 21,527) and post-holiday customer-collection rates have improved to 85.4% of due compared with 79% in January and a pre-pandemic norm of c 90%. The group notes that it is optimistic that Advantage will reach its advances and profit growth targets for the year. Aspen is benefiting from its participation in the government guaranteed Coronavirus Business Interruption Loan Scheme (CBILS) and its net receivables stand at over £50m (£34.1m at end January). Average deal size in Q122 was over £1m (FY21: c £0.54m), with overall maximum gross LTVs reduced to 59%. Profitability reached a record level in Q122.

Financial position and outlook

At the end of the period, group borrowings stood at £111m (gearing 60%) and loan facilities have been increased by £25m, taking the total to £180m and providing scope for expected growth. Current trends for both businesses are encouraging, but developments in the pandemic and the macroeconomic background remain sensitivities for the group and we have left our estimates unchanged at this stage (see next page for an update on industry data).

Valuation

On our estimates the shares trade on a current year prospective P/E of nearly 16.8x, but this falls to 12.6x in FY22 as fuller benefits of a recovery in volumes and credit quality are assumed to flow through. Using an ROE/COE model, the price to book ratio of 1.8x implies a return on equity (ROE) of just over 16%, approaching the pre-pandemic five-year average level.

Market background

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 independent forecasts for UK GDP and unemployment as collected by the UK Treasury in May. Compared with the March data shown in our detailed outlook note in April, the latest GDP forecasts are higher for 2021 but lower for 2022. This probably reflects the assumption that the success of the vaccination programme brings forward recovery and these numbers could be moderated if COVID-19 variants of concern hamper the easing of restrictions. Unemployment expectations have been lowered for both years and on all the measures shown. This is positive for Advantage, if maintained, as unemployment is a key sensitivity.

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

%

Average

Average of new forecasts

Low

High

GDP growth

2021

6.4

6.5

4.9

8.1

2022

5.4

5.6

2.2

8.2

Labour Force Survey unemployment rate Q4

2021

5.9

5.9

5.2

6.5

2022

5.2

5.1

4.3

7.0

Source: HM Treasury

Exhibit 2 shows a definite revival in consumer confidence as the easing of lockdown restrictions began. While there are near-term uncertainties and virus variants pose an ongoing threat, continued success with the vaccination and testing programmes would be likely to have a further positive effect on confidence. Exhibit 3 shows that the unemployment rate has moved up, but appears to be moderating slightly on the latest, provisional, readings. It is still being cushioned by government job protection measures to some extent. Redundancies, a more immediate measure, saw a very sharp spike as the pandemic made an impact, but, encouragingly, are now approaching more normal levels.

Exhibit 2: GfK UK consumer confidence indicator

Exhibit 3: UK redundancies and unemployment

Source: Refinitiv (last value April 2021)

Source: ONS (last value March 2021)

Exhibit 2: GfK UK consumer confidence indicator

Source: Refinitiv (last value April 2021)

Exhibit 3: UK redundancies and unemployment

Source: ONS (last value March 2021)

We now turn to 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. Volume recovered very well following the initial lockdown, albeit with further dips following subsequent lockdowns. Exhibit 5 shows a similar pattern in used car finance, with the latest reading (for March) showing a strong percentage increase compared with the depressed prior year period. The Finance & Leasing Association (FLA) has previously indicated that it looks for the overall value of new car finance business for calendar 2021 to grow by 17%, followed by 12% in 2022. As noted earlier, the recovery in volumes Advantage saw in April were below its expectations but it has still seen growth and looks for this to continue, subject to market and macroeconomic developments.

Exhibit 4: Used car transactions and new registrations

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 and new registrations

Source: SMMT, Edison Investment Research

Exhibit 5: Used car finance through dealerships

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

On used car prices, these were buoyant in 2020 and early 2021 with strong consumer demand and reduced supply pushing prices up. In a May update, auctioneer Aston Barclay has commented that it has seen an 8% increase in prices at its auction sites and has previously suggested that it would take a few months for supply to catch up with demand. A return to a more balanced market and lower prices in some segments could be hastened by increased repossessions in due course. For Advantage the exposure to lower auction prices on repossessions is limited by the relatively low value of the vehicles it finances.

Looking at the background for Aspen Bridging, Exhibit 6 shows the number of UK non-residential and residential transactions, with residential being most relevant for Aspen. Both have seen a sustained improvement following the initial lockdown. 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. The CBILS lending mentioned earlier could also give useful access to new customers and brokers as well as expanding the loan book in the short term.

Exhibit 6: UK property transactions (seasonally adjusted)

Source: HM Revenue & Customs. Note: Figures for January to March 2021 are provisional. SA = seasonally adjusted.


Exhibit 7: Financial summary

£'000s

2017

2018

2019

2020

2021

2022e

2023e

Year end 31 January

PROFIT & LOSS

Revenue

 

 

60,521

79,781

82,970

89,939

83,761

88,587

94,461

Impairments

(12,194)

(19,596)

(16,941)

(17,220)

(36,705)

(28,223)

(22,204)

Other cost of sales

(12,871)

(17,284)

(15,751)

(19,872)

(14,264)

(20,156)

(21,521)

Administration expenses

(8,332)

(9,629)

(10,763)

(12,413)

(10,576)

(11,516)

(12,563)

EBITDA

 

 

27,124

33,272

39,515

40,434

22,216

28,692

38,173

Depreciation

 

 

(253)

(294)

(414)

(450)

(520)

(528)

(475)

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

 

 

26,871

32,978

39,101

39,984

21,696

28,164

37,698

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)

(3,568)

(4,310)

(5,946)

Profit before tax

 

 

25,203

30,160

34,560

35,134

18,128

23,853

31,752

Tax

(4,861)

(5,746)

(6,571)

(6,252)

(3,482)

(4,532)

(6,033)

Profit after tax

 

 

20,342

24,414

27,989

28,882

14,646

19,321

25,720

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

120.7

159.2

211.9

EPS - basic (p)

 

 

170.7

203.8

233.2

239.6

120.7

159.2

212.0

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%

26.5%

32.4%

40.4%

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

44.4%

41.3%

47.1%

44.5%

25.9%

31.8%

39.9%

Return on equity

15.2%

16.7%

17.6%

16.8%

8.1%

10.5%

13.2%

BALANCE SHEET

Non-current assets

 

 

138,004

181,015

185,383

197,806

173,413

231,494

258,273

Current assets

 

 

57,763

84,178

95,430

108,275

111,426

122,305

136,754

Total assets

 

 

195,767

265,193

280,813

306,081

284,839

353,799

395,027

Current liabilities

 

 

(17,850)

(7,927)

(6,722)

(7,424)

(5,309)

(4,357)

(4,518)

Non current liabilities inc pref

(38,450)

(104,450)

(108,724)

(119,183)

(98,501)

(160,923)

(188,345)

Net assets

 

 

139,467

152,816

165,367

179,474

181,029

188,519

202,164

NAV per share (p)

1,177

1,276

1,375

1,493

1,505

1,568

1,681

CASH FLOW

Operating cash flow

 

 

(27,431)

(43,418)

10,530

4,946

32,940

(47,259)

(14,729)

Net cash from investing activities

(308)

(1,040)

(785)

(265)

(1,112)

(250)

(250)

Dividends paid

(9,548)

(11,377)

(13,080)

(14,461)

(13,098)

(11,892)

(12,134)

Other financing (excluding change in borrowing)

21

12

14

14

2

0

0

Net cash flow

 

 

(37,266)

(55,823)

(3,321)

(9,766)

18,732

(59,401)

(27,113)

Opening net (debt)/cash

 

 

(11,901)

(49,167)

(104,990)

(108,311)

(118,077)

(99,345)

(158,746)

Closing net (debt)/cash

 

 

(49,167)

(104,990)

(108,311)

(118,077)

(99,345)

(158,746)

(185,859)

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.

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.

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Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

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New Zealand

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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.

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Frankfurt +49 (0)69 78 8076 960

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London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

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United States of America

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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

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).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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