Positive trend in quantity and quality of lending

S&U 8 December 2017 Update
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S&U

Positive trend in quantity and quality of lending

December trading update

Financial services

8 December 2017

Price

2,302.5p

Market cap

£276m

Net debt (£m) at end July 2017

80.7

Shares in issue

12.0m

Free float

26%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.6

17.1

15.3

Rel (local)

12.5

17.9

7.4

52-week high/low

2420.0p

1883.5p

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 53,000 customers currently. The pilot Aspen Bridging finance business is expanding its loan book (c £9m).

Next events

Q4 and FY18 update

9 February 2017

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 trading update for the period since its half-year end confirmed that it is trading in line with expectations and our estimates are unchanged. Transactions and receivables outstanding continue to grow even though underwriting criteria have been tightened. Impairment rates have edged up further but should stabilise and reverse as the loan book mix evolves.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/16

45.2

19.5

132.4

76.0

17.4

3.3

01/17

60.5

25.2

169.1

91.0

13.6

4.0

01/18e

80.0

30.3

201.9

105.0

11.4

4.6

01/19e

95.6

35.5

235.8

117.4

9.8

5.1

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

Motor finance continues growth

Advantage reports that applications for motor finance have been strong and, even though underwriting refinements have meant a slight reduction in the rate of approvals, transaction growth has been maintained and receivables stand at over £240m, up nearly 6% in the period since the end of July or c 24% since the end of January. A new e-signature system that guides customers through terms and conditions and verifies their digital sign-off is being well-received and is contributing to a higher rate of conversion from approvals to transactions (c 10% in recent years). Tighter lending criteria mean the quality metrics on new loans have risen but the legacy effect of the previous move towards higher-risk customers means the impairment rate relative to revenue has ticked up modestly (23.4% vs 22.9% H118). Given the recent announcement from Provident Financial that its non-prime motor finance subsidiary, Moneybarn, is the subject of an FCA investigation relating to customer affordability and treatment of customers in financial difficulty, it is worth mentioning that Advantage was authorised by the FCA in December 2016 and has not been involved in any ongoing FCA discussions since that point. Management stresses its commitment to responsible lending and use of a sophisticated affordability process.

Aspen Bridging pilot builds its loan book

The Aspen property bridging finance pilot has increased its loan book significantly, from £2m at the half year stage to £9m, with loan to value and pricing in line with budgets. The intention remains to build this to c £20m and the trial period is set to end in H218. The early signs are promising but the business is still nascent.

Valuation

Our, unchanged valuation of 2,700p is based on consideration of an ROE/COE model and peer group valuations (see overleaf). This suggests upside of c 18% from the current share price. On our estimates, the yield for FY18 is 4.6%.

Valuation

We have updated our usual peer comparison table below. Even after a relatively strong period for the S&U share price over the last two months the shares trade only modestly above the average P/E valuation and offer a yield of 4%.

Exhibit 1: Peer comparison

Price (p)

Market cap (£m)

2017 P/E (x)

Yield (%)

ROE (%)

Price to book (x)

S&U

2,270.0

272.2

11.4

4.0

15.2

1.9

1PM

48.5

41.8

6.2

0.0

12.5

0.9

Close Brothers

1,389.0

2,104.6

10.4

4.3

16.4

1.7

Private and Commercial Finance

28.5

60.5

10.6

0.0

11.4

1.8

Provident Financial

810.0

1,200.7

14.5

N/A

N/A

1.6

Secure Trust Bank

1,812.0

334.8

13.2

4.1

11.9

1.4

Average

11.1

2.5

13.5

1.6

Source: Bloomberg, Edison Investment Research. Note: P/Es adjusted to CY17. Priced at 7 December 2017.

Exhibit 2 shows how a stronger recent performance has left the shares as one of the better performers over the periods shown. Provident Financial remains an outlier on the downside, reflecting its stock-specific difficulties, which have been compounded, as noted above, by the announcement of regulatory investigation of Moneybarn.

Exhibit 2: Share price performance comparison

One month

Three months

One year

Ytd

From 12-month high

S&U

8.1

15.4

13.7

3.1

(7.1)

1PM

2.1

(1.0)

(20.7)

(23.2)

(23.8)

Close Brothers

3.5

(8.9)

0.2

(3.9)

(19.0)

Private and Commercial Finance

2.7

17.5

(4.9)

3.8

(10.9)

Provident Financial

(9.5)

2.7

(71.4)

(71.6)

(75.3)

Secure Trust Bank

(1.7)

4.7

(16.3)

(15.8)

(27.5)

Average (unweighted)

0.9

5.1

(16.6)

(17.9)

(27.3)

Source: Bloomberg

With unchanged estimates we maintain our valuation at 2,700p, reflecting consideration of an ROE/COE model and peer valuations. See our last note, published in October, for further details of this and a discussion of the market background and outlook.

Exhibit 3: 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 2017 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 2017. “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 2017 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 2017. “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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