Trading broadly in line

S&U 10 December 2018 Update
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S&U

Trading broadly in line

December trading update

Financial services

10 December 2018

Price

2,150p

Market cap

£257m

Net debt (£m) end July 2018

121.4

Shares in issue

12.0m

Free float

26%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.5)

(14.9)

(6.8)

Rel (local)

4.9

(7.7)

1.1

52-week high/low

2,790p

1,920p

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 that restrict their access to mainstream products. It has 59,000 customers. The Aspen property bridging business has moved beyond the pilot stage and is expanding its loan book (c £18m December 2018).

Next events

Q4 and FY19 trading update

6 February 2019

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 latest trading update indicates it is on track to deliver results close to expectations for the current year. Motor finance receivables growth slowed in the second half, which prompted a reduction in our estimates, primarily for FY20. We still look for a return on equity (ROE) of above 17% and believe the discipline shown in holding to pricing and credit criteria at Advantage is a positive sign for investors. Our expectations for Aspen Property Bridging are unchanged and it should provide a valuable diversifying contribution to profits.

Year end

Revenue (£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/17

60.5

25.2

169.1

91.0

12.7

4.2

01/18

79.8

30.2

202.4

105.0

10.6

4.9

01/19e

91.1

34.5

231.4

118.0

9.3

5.5

01/20e

100.1

38.3

256.6

130.5

8.4

6.1

Note: PBT and EPS are reported.

Trading update signals in line for FY19

S&U’s December trading update indicates it is trading broadly in line with expectations for the current year. The used car finance market has been resilient but S&U reports a slight reduction in loan applications and an increase in competitive pressure for Advantage (something that has been seen previously on occasion). This, and tighter credit criteria, has meant the number of new loans year to date is down 7% versus last year. Growth in the loan book has therefore slowed noticeably (receivables stand at £267m vs £263.5m end-July). As expected, the risk-adjusted yield has fallen slightly since July at 25.0% vs 25.4%, reflecting the worse than expected quality of some loans taken on last year. Positively, cash collections from newer customers indicate moves to increase credit quality are paying off. The Aspen property bridging finance business, no longer a pilot project, continues to make progress and is looking to expand its loan book to c £30m during calendar year 2019.

Background and outlook: Tempering FY20e growth

Advantage’s in-house expertise in customising credit rating metrics facilitates refinement of credit criteria and its experience in adjusting to changing markets is evident in its discipline when competitors offer what it sees as unattractive terms to win business. This has reduced the growth in receivables and, with the reduced risk-adjusted yield, has led to a tempering in our estimates. For the current year this is only marginal (-1.5% for EPS) whereas for FY20e our assumption of lower receivables growth results in an 8% reduction in estimated EPS.

Valuation: Still looks conservative on lower estimates

S&U shares trade on an FY20 P/E multiple of below 9x on our revised estimates with a historical yield of nearly 5%. On a calendarised basis it trades close to peer average P/Es for this year and next and generates an above-average ROE while only commanding a slightly above average price to book multiple. Our ROE/COE valuation stands at 2,800p (previously 3,060p).

Car market trends and Aspen investment to increase

Industry data for the used-car market demonstrate its greater recent stability compared with the new car market (Exhibit 1 shows trends in SMMT data for registrations and used-car transactions). The number of point-of-sale car financing transactions has continued to grow but has also shown a disparity between new and used cars, with new car financing down 5% in the 12 months to end September compared with the rise of 8% for used cars. For September alone the number of used-car finance transactions was up 3%, suggesting some tapering in growth compared with compound annual growth of 10% between 2009 and 2017 (quarterly trend shown in Exhibit 2).

Within the used car market, Advantage addresses the lower to middle income segment with an average loan size of c £6,200, where vehicles are most commonly used for transport to work: features that tend to mitigate the risk of default and exposure to potential weakness in used car prices. Loans are straightforward hire-purchase contracts and Advantage does not offer personal purchase contract loans.

Exhibit 1: UK car market trends (% change y-o-y)

Exhibit 2: Used-car finance through dealerships

Source: SMMT

Source: Finance and Leasing Association

Exhibit 1: UK car market trends (% change y-o-y)

Source: SMMT

Exhibit 2: Used-car finance through dealerships

Source: Finance and Leasing Association

In November S&U announced it will develop its Aspen property bridging finance business beyond the pilot stage. The loan book is c £18m (£16.3m at the half year) and for 2019 investment will be increased to £30m, a significant step up but still small in the context of the market and the group.

The average loan size at Aspen is c £380,000, with an interest rate of just over 1% per month and an original term of between six and 12 months. In its trading update S&U noted that stepped loans have been popular and profitable. As an illustration, these may offer a lower interest rate over four months at 0.65%, followed by a step up to 1.25% for the balance of the period. Aspen loans are made for refurbishment rather than rebuilding (avoiding risks related to timing and collateral value). The business was in profit at the half year (£0.28m profit in the period to end July). Aspen expects a return on capital of around 12% and, while this is lower than the figure of c 15% earned by Advantage, it is still attractive taking into account the different characteristics of the businesses.

The business should provide a welcome diversification for the group and (subject to credit experience) further loan book growth from £30m to £50m could see it generating a pre-tax profit of c £5m.

Financials: Estimate changes

The main figures from our segmental forecasts are shown in Exhibit 3. We have not changed our estimates for bridging finance and the main change in motor finance, as noted earlier, is a lower rate of receivables growth assumed for both forecast years. The risk-adjusted yield is slightly lower than previously, but we still assume a small improvement in FY20 as the tightening of criteria progressively feeds into the loan book.

Exhibit 3: Segmental analysis

£000s

2016

2017

2018

2019e

2020e

Motor

Net accounts receivable

145,141

193,529

251,215

268,724

296,268

Revenue

45,182

60,521

78,882

88,239

95,427

Impairments

(7,611)

(12,194)

(19,434)

(23,012)

(23,899)

Ratios

Net receivables growth

36%

33%

30%

7%

10%

Revenue as % avg receivables

35.9%

35.7%

35.5%

33.9%

33.8%

P&L loan loss provision as % revenue

(16.8%)

(20.1%)

(24.6%)

(26.1%)

(25.0%)

Risk adjusted yield on average receivables

29.9%

28.5%

26.7%

25.1%

25.3%

P&L loan loss provision as % avg receivables

(6.1%)

(7.2%)

(8.7%)

(8.9%)

(8.5%)

Bridging finance

Net loans end of period

10,841

20,000

30,000

Interest/fee revenue

899

2,870

4,625

Loan loss provision

(162)

(241)

(393)

Ratios

Interest/fee revenue % of average receivables

24.9%

18.1%

18.5%

P&L loan loss provision % ave receivables

(4.5%)

(1.5%)

(1.6%)

Group

Accounts receivable

145,141

193,529

262,056

288,724

326,268

Revenue

45,182

60,521

79,781

91,109

100,052

Source: S&U, Edison Investment Research

The changes in the headline numbers of our estimates flowing from the revised segmental assumptions are summarised in Exhibit 4 and further details are included in Exhibit 6.

Exhibit 4: Changes to estimates

Year end

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)

January

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

2019e

92.4

91.1

-1.4

35.0

34.5

-1.5

235.0

231.4

-1.5

118.0

118.0

0.0

2020e

106.7

100.1

-6.2

41.8

38.3

-8.3

280.0

256.6

-8.3

140.0

130.5

-6.8

Source: Edison Investment Research

Valuation

We have updated our peer comparison table (Exhibit 5), which includes a number of companies involved in non-standard lending or have motor finance as one of their activities. S&U trades on calendar year 2018 and 2019 P/Es close to the averages and on an above-average yield. The ROE is above the group average, whereas the price-to-book is only modestly higher than average.

Although our estimates have been reduced, we still look for the ROE to move to more than 17% for FY19 and FY20. Factoring an assumed cost of equity of 10%, long-term growth of 4% (5% previously) and an ROE of 17% to a ROE/COE model would give a value of 2,800p (3,060p previously) .

Exhibit 5: Peer comparison

Price (p)

Market cap

(£m)

P/E 2018 (x)

P/E 2019 (x)

Yield

(%)

ROE

(%)

P/BV

(x)

S&U

2,150

257

9.4

8.4

5.5%

16.7

1.7

1PM

41

36

5.6

5.4

2.1%

13.0

0.7

Close Brothers

1,428

2,152

10.4

10.2

4.6%

16.3

1.6

OneSavings Bank

336

819

6.2

5.8

4.2%

25.5

1.4

PCF Group

36

77

16.3

10.8

1.1%

10.3

1.8

Provident Financial

608

1,533

11.9

9.4

1.8%

14.0

2.3

Secure Trust Bank

1,378

253

9.1

7.4

6.0%

8.9

1.0

Average

 

 

9.9

8.2

3.3%

14.6

1.5

Source: Thomson Reuters, Edison Investment Research. Note: P/Es are adjusted to calendar years. Priced at 7 December 2018.

Exhibit 6: Financial summary

£'000s

2016

2017

2018

2019e

2020e

Year end 31 January

PROFIT & LOSS

Revenue

 

 

45,182

60,521

79,781

91,109

100,052

Impairments

(7,611)

(12,194)

(19,596)

(23,253)

(24,292)

Other cost of sales

(8,980)

(12,871)

(17,284)

(17,450)

(19,310)

Administration expenses

(7,131)

(8,332)

(9,629)

(11,066)

(12,006)

EBITDA

 

 

21,460

27,124

33,272

39,340

44,444

Depreciation

 

 

(209)

(253)

(294)

(359)

(399)

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

 

 

21,251

26,871

32,978

38,981

44,045

Exceptionals

0

0

0

0

0

Non recurring items

0

0

0

0

0

Investment revenues / finance expense

(1,782)

(1,668)

(2,818)

(4,473)

(5,769)

Profit before tax (FRS 3)

 

 

19,469

25,203

30,160

34,508

38,276

Profit before tax (norm)

 

 

19,469

25,203

30,160

34,508

38,276

Tax

(3,583)

(4,861)

(5,746)

(6,556)

(7,272)

Discontinued business after tax

53,299

Profit after tax (FRS 3)

 

 

69,185

20,342

24,414

27,953

31,003

Profit after tax (norm)

 

 

15,886

20,342

24,414

27,953

31,003

Average Number of Shares Outstanding (m)

12.0

12.0

12.1

12.1

12.1

Diluted EPS (p)

 

 

576.5

169.1

202.4

231.4

256.6

EPS - normalised (p)

 

 

132.4

169.1

202.4

231.4

256.6

Dividend per share (p)

201.0

91.0

105.0

118.0

130.5

EBITDA margin (%)

47.5%

44.8%

41.7%

43.2%

44.4%

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

47.0%

44.4%

41.3%

42.8%

44.0%

Return on equity

15.2%

15.2%

16.7%

17.6%

17.9%

BALANCE SHEET

Non-current assets

 

 

103,653

138,004

181,015

196,262

221,573

Current assets

 

 

61,903

57,763

84,178

107,597

130,101

Total assets

 

 

165,556

195,767

265,193

303,858

351,674

Current liabilities

 

 

(6,850)

(17,850)

(7,927)

(7,203)

(7,488)

Non-current liabilities inc pref

(30,450)

(38,450)

(104,450)

(131,202)

(162,086)

Net assets

 

 

128,256

139,467

152,816

165,453

182,101

NAV per share (p)

1,084

1,177

1,276

1,381

1,520

CASH FLOW

Operating cash flow

 

 

(16,017)

(27,431)

(43,418)

(998)

(5,716)

Net cash from investing activities

80,716

(308)

(1,040)

(588)

(588)

Dividends paid

(23,090)

(9,548)

(11,377)

(13,084)

(14,576)

Other financing (excluding change in borrowing)

55

21

12

(3)

(16)

Net cash flow

 

 

41,664

(37,266)

(55,823)

(14,673)

(20,896)

Opening net (debt)/cash

 

 

(53,565)

(11,901)

(49,167)

(104,990)

(119,663)

Closing net (debt)/cash

 

 

(11,901)

(49,167)

(104,990)

(119,663)

(140,559)

Source: S&U Accounts, Edison Investment Research. Note: FY16 dividend per share includes exceptional payment of 125p.

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This report has been commissioned by SymBio Pharmaceuticals and prepared and issued by Edison, in consideration of a fee payable by SymBio Pharmaceuticals. 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.

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Schumannstrasse 34b

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London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

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295 Madison Avenue, 18th Floor

10017, New York

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Level 4, Office 1205

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NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by SymBio Pharmaceuticals and prepared and issued by Edison, in consideration of a fee payable by SymBio Pharmaceuticals. 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 Edison analyst 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 2018 Edison Investment Research Limited (Edison). All rights reserved 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.

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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 Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). 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.

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Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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