Good loan growth and credit experience on track

S&U 12 February 2018 Update
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S&U

Good loan growth and credit experience on track

FY18 trading update

Financial services

12 February 2018

Price

2,205p

Market cap

£265m

Net debt (£m) February 2018

105

Shares in issue

12.0m

Free float

26%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.9)

4.7

2.4

Rel (local)

0.2

10.2

3.2

52-week high/low

2,420p

1,884p

Business description

S&U’s Advantage motor finance business lends on a simple hire purchase basis to lower and middle income groups that may have impaired credit records which restrict their access to mainstream products. It has c 54,000 customers currently. The pilot Aspen Bridging finance business is expanding its loan book (c £10m).

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Next events

FY18 results

27 March 2018

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’s year-end update confirms strong growth has continued at the main motor finance business with customer numbers up 26%, while credit criteria have been tightened to underpin the quality of receivables prospectively. Confidence in the property bridging business is growing, although it remains at a trial stage. Overall trading is in line with management expectations and our estimates are unchanged.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/16

45.2

19.5

132.4

76.0

16.7

3.4

01/17

60.5

25.2

169.1

91.0

13.0

4.1

01/18e

80.0

30.3

201.9

105.0

10.9

4.8

01/19e

95.6

35.5

235.8

117.4

9.4

5.3

Note: *PBT and EPS are reported from continuing operations. FY16 DPS excludes exceptional payment of 125p.

Motor finance customer growth with tighter criteria

Advantage motor finance customer numbers stand at c 54,000, up 26% compared with end-FY17, while the 24,500 new transactions completed during FY18 represented an increase of 22% on the prior year. Advantage has continued to implement tighter criteria, which has resulted in an increase in the credit scores of new customers. This will take time to be fully reflected in the overall impairment rate but should more evident in FY19 and beyond. Helping to bolster customer numbers is Dealflo, an e-signature system that guides customers through terms and conditions and verifies their digital sign-off. This is contributing to a higher rate of conversion from approvals to transactions (c 10% in recent years). While new car registrations in the UK have shown distinct weakness (down 14% in 2017), used car sales have been much more resilient (see overleaf) and S&U suggests lower new car sales could support used car values as more people opt for used versus new.

Aspen, introduction of IFRS 9

The Aspen property bridging business has continued to build its loan book, with over £10m of loans issued. The business remains a pilot but confidence in the viability of the operation is increasing. FY19 sees the introduction of IFRS 9 and S&U has given an initial indication of potential impact of the accounting change on group numbers. IFRS 9 is designed to bring forward provisioning for bad loans where appropriate through the application of an expected loss model for certain loans. The net effect (allowing for deferred tax) could be a c £3m reduction in the level of opening receivables (and shareholders’ equity), taking the centre of the range indicated (0.5%-2.5% of receivables). There will be no change in cash flows and the impact is modest relative to overall equity (£143m at end-H118).

Valuation

Our unchanged valuation of 2,700p is based on consideration of an ROE/COE model and peer group valuations. This suggests upside of over 20% from the current share price. On our estimates, the yield for FY18 is 4.8%.

Indicators for the UK used car market

For reference, we include three charts tracking activity and pricing in the UK used car market. The first shows the volume of transactions in the market up to the third quarter of 2017. While there was a small percentage reduction in Q317, the overall picture has been relatively stable. The next chart shows the level of car finance provided through dealerships, including that used for both new and used to show the divergence of trend with used finance remaining buoyant recently.

Exhibit 1: UK used car market volume

Exhibit 2: Car finance through dealerships

Source: SMMT

Source: Finance and Leasing Association

Exhibit 1: UK used car market volume

Source: SMMT

Exhibit 2: Car finance through dealerships

Source: Finance and Leasing Association

Exhibit 3 collates BCA data for auction prices. We have included prices for fleet and lease sales and dealer part exchange, but excluded nearly new cars as they are relatively low in volume and at a much higher price level. A typical price level for an Advantage customer is around £7,000, so between the categories shown on the chart. While the BCA data is contingent on the company’s mix of business, which may not reflect overall market trends, it does tend to indicate stability in prices, particularly towards the lower end of the pricing range.

Exhibit 3: BCA auction prices (£)

Source: BCA

Exhibit 4: Financial summary

£000s

2015

2016

2017

2018e

2019e

Year end 31 January

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

36,102

45,182

60,521

80,014

95,623

Impairments

(5,863)

(7,611)

(12,194)

(18,252)

(21,366)

Other cost of sales

(6,674)

(8,980)

(12,871)

(17,763)

(20,559)

Administration expenses

(6,957)

(7,131)

(8,332)

(10,162)

(12,144)

EBITDA

 

 

16,608

21,460

27,124

33,836

41,554

Depreciation

 

 

(163)

(209)

(253)

(348)

(626)

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

 

 

16,445

21,251

26,871

33,489

40,928

Exceptionals

0

0

0

0

0

Non-recurring items

0

0

0

0

0

Investment revenues / finance expense

(1,680)

(1,782)

(1,668)

(3,146)

(5,384)

Profit before tax (FRS 3)

 

 

14,765

19,469

25,203

30,343

35,544

Profit before tax (norm)

 

 

14,765

19,469

25,203

30,343

35,544

Tax

(2,920)

(3,583)

(4,861)

(5,997)

(7,109)

Discontinued business after tax

6,615

53,299

Profit after tax (FRS 3)

 

 

18,460

69,185

20,342

24,346

28,435

Profit after tax (norm)

 

 

11,845

15,886

20,342

24,346

28,435

Average Number of Shares Outstanding (m)

12.0

12.0

12.0

12.1

12.1

Diluted EPS (p)

 

 

154.3

576.5

169.1

201.9

235.8

EPS - normalised (p)

 

 

99.0

132.4

169.1

201.9

235.8

Dividend per share (p)

66.0

201.0

91.0

105.0

117.4

EBITDA margin (%)

46.0%

47.5%

44.8%

42.3%

43.5%

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

45.6%

47.0%

44.4%

41.9%

42.8%

Return on equity

15.7%

15.2%

15.2%

16.7%

17.7%

BALANCE SHEET

Non-current assets

 

 

76,781

103,653

138,004

182,253

219,322

Current assets

 

 

68,578

61,903

57,763

79,351

97,837

Total assets

 

 

145,359

165,556

195,767

261,604

317,159

Current liabilities

 

 

(8,945)

(6,850)

(17,850)

(8,401)

(23,180)

Non-current liabilities inc pref

(54,950)

(30,450)

(38,450)

(100,450)

(125,450)

Net assets

 

 

81,464

128,256

139,467

152,753

168,529

NAV per share (p)

689

1,084

1,177

1,275

1,407

CASH FLOW

Operating cash flow

 

 

(13,404)

(16,017)

(27,431)

(34,873)

(21,543)

Net cash from investing activities

(1,096)

80,716

(308)

(1,618)

(1,618)

Dividends paid

(6,734)

(23,090)

(9,548)

(11,380)

(12,977)

Other financing (excluding change in borrowing)

8

55

21

2

0

Net cash flow

 

 

(21,226)

41,664

(37,266)

(47,869)

(36,138)

Opening net (debt)/cash

 

 

(32,339)

(53,565)

(11,901)

(49,167)

(97,036)

Closing net (debt)/cash

 

 

(53,565)

(11,901)

(49,167)

(97,036)

(133,174)

Source: S&U accounts, Edison Investment Research. Note: FY16 DPS includes an exceptional payment of 125p.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by S&U and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by S&U and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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