Trading remains strong

S&U 13 February 2017 Update

S&U

Trading remains strong

Year-end trading update

Financial services

13 February 2017

Price

2,225p

Market cap

£267m

Net debt (£m) at end January 2017

49

Shares in issue

12.0m

Free float

26%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.5

(1.3)

8.0

Rel (local)

1.3

(7.2)

(14.7)

52-week high/low

2,610.00p

1,997.00p

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 43,000 customers currently. The pilot Aspen Bridging finance business is now open.

Next events

FY17 results

28 March 2017

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Julian Roberts

+44 (0)20 3077 5748

S&U is a research client of Edison Investment Research Limited

In its year-end update, S&U confirmed FY17 finished strongly and in line with market expectations. Advantage motor finance recorded a 32% increase in customer numbers and the impairment ratio is running in line with expectations. Funding remains in place for further growth at Advantage and the bridging finance pilot, which is now open for business.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/15

36.1

14.8

99.0

66.0

22.5

3.0

01/16

45.2

19.5

132.4

76.0

16.8

3.4

01/17e

61.2

25.8

171.0

90.0

13.0

4.0

01/18e

77.9

31.0

206.0

109.8

10.8

4.9

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. FY16 DPS ex-exceptional payment of 125p.

Strong finish to year

Advantage has continued to grow strongly with the number of live customers reaching 43,000: the second year of growth of over 30%. Customer transactions at 20,000 grew at a similar rate. In its January trading update Provident Financial reported a quieter Q4 for its Moneybarn business but S&U has sustained growth through this period helped by a focus on service and within its non-prime sweet spot in the credit risk spectrum. While impairments increased in FY17, this reflected a move to a slightly higher risk-reward profile on loans, and is in line with management expectations. Our estimates are unchanged from our last note published in December.

Funding in place and bridging pilot open

S&U invested £33m in the motor finance business in FY17 (compared with £27m in FY16). It has total bank facilities of £85m and had net debt of £49m at the end of January. The group sees this as sufficient to fund growth at Advantage this year and the launch of the bridging finance pilot. Further facilities will be negotiated as required. Aspen Bridging is now open for business and up to £20m may be invested over 15 months; management will take a prudent approach to developing this opportunity.

Valuation: Growth and yield appeal

S&U shares trade on a yield of 4% based on our estimated full-year dividend of 90p (first two interims total 52p versus 43p last year). On our forecasts, earnings growth for FY17 would be nearly 29% and 20% for FY18. Reflecting unchanged estimates and assumptions, our ROE-/COE-based valuation is also unchanged at c 2,650p. Further sustained growth at Advantage and success with the bridging pilot would be likely to drive returns and the rating (on a price to book basis) higher on a medium-term view.

Valuation

We have updated our valuation comparison table, which includes peers involved in non-standard lending or that have motor finance as one of their activities. Within this group S&U trades close to the average P/E and an above-average yield. Its return on equity is below average but the group does include Provident Financial, earning a return of over 38%, so in this context it can be viewed as mid-range. Mirroring this positioning, it trades on a below-average price to book ratio.

Exhibit 1: Peer comparison

Price (p)

Market cap (£m)

2016 P/E (x)

Yield (%)

ROE (%)

Price to book (x)

S&U

2,225.0

266.2

13.3

3.4

15.2

2.0

1PM

58.5

31.9

9.0

0.9

12.9

1.2

Close Brothers

1,500.0

2,252.3

11.9

3.8

17.7

2.1

Private and Commercial Finance

25.3

43.0

13.3

0.0

13.4

1.8

Provident Financial

2,761.0

4,080.0

16.0

4.3

38.6

5.6

Secure Trust Bank

230.2

415.7

16.0

3.2

12.7

1.8

Average

13.2

2.6

18.4

2.4

Source: Bloomberg, Edison Investment Research. Note: P/Es adjusted to CY16. Priced at 13 February 2017.

Exhibit 2 shows the price to book values against ROEs for the same companies. The small sample means we cannot draw any strong conclusions, but S&U can be seen as being broadly centrally placed, with Provident Financial valued at a level that arguably fully reflects its high ROE. Prospectively, continuation of S&U’s growth in motor finance and success with its bridging finance pilot could deliver higher returns and valuation. Our valuation, based on a ROE/COE model, remains unchanged at c 2,650p (assumptions, as before, include a return on equity of 17%, cost of equity of 10% and growth of 5%).

Exhibit 2: Return on equity and price/NAV for S&U and selected peers

Source: Bloomberg. Note: OPM (1PM), PCF (Private and Commercial Finance), CBG (Close Brothers), PFG (Provident Financial). Based on historical numbers for ROE and NAV. As at 13 February 2017.

Finally, Exhibit 3 shows recent share price performance for the peer group. Here performance is quite widely dispersed over the different periods although S&U has been modestly ahead or close to the average: an improvement since we last wrote in December, probably reflecting the reassuring nature of the latest trading updates.

Exhibit 3: Share price performance comparison

One month

Three months

One year

Ytd

From 12-month high

S&U

2.3

0.5

1.1

1.0

(14.8)

1PM

(8.6)

(9.3)

(10.0)

(9.3)

(19.9)

Close Brothers

3.4

12.4

24.2

3.8

(1.1)

Private and Commercial Finance

(4.7)

(11.4)

23.2

(8.2)

(27.9)

Provident Financial

(2.9)

(0.6)

(8.5)

(3.1)

(18.8)

Secure Trust Bank

(4.3)

2.8

(15.5)

4.6

(18.3)

Average (unweighted)

(2.5)

(0.9)

2.4

(1.9)

(16.8)

Source: Bloomberg. Note: As at 13 February 2017.

Exhibit 4: Financial summary

£'000s

2014

2015

2016

2017e

2018e

Year end 31 January

PROFIT & LOSS

Revenue

 

 

60,823

36,102

45,182

61,232

77,924

Impairments

(12,847)

(5,863)

(7,611)

(11,349)

(14,224)

Other cost of sales

(6,866)

(6,674)

(8,980)

(13,387)

(17,115)

Administration expenses

(22,519)

(6,957)

(7,131)

(8,620)

(11,260)

EBITDA

 

 

18,591

16,608

21,460

27,876

35,325

Depreciation

 

 

(577)

(163)

(209)

(241)

(294)

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

 

 

18,014

16,445

21,251

27,635

35,030

Exceptionals

0

0

0

0

0

Non-recurring items

0

0

0

0

0

Investment revenues / finance expense

(727)

(1,680)

(1,782)

(1,863)

(4,024)

Profit before tax (FRS 3)

 

 

17,287

14,765

19,469

25,772

31,006

Profit before tax (norm)

 

 

17,287

14,765

19,469

25,772

31,006

Tax

(3,955)

(2,920)

(3,583)

(5,184)

(6,201)

Discontinued business after tax

6,615

53,299

Profit after tax (FRS 3)

 

 

13,332

18,460

69,185

20,589

24,805

Profit after tax (norm)

 

 

13,332

11,845

15,886

20,589

24,805

Average Number of Shares Outstanding (m)

11.9

12.0

12.0

12.0

12.0

EPS - normalised (p)

 

 

112.0

99.0

132.4

171.0

206.0

Dividend per share (p)

54.0

66.0

201.0

90.0

109.8

EBITDA margin (%)

30.6%

46.0%

47.5%

45.5%

45.3%

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

29.6%

45.6%

47.0%

45.1%

45.0%

Return on equity

20.5%

15.7%

15.2%

15.4%

16.9%

BALANCE SHEET

Non-current assets

 

 

52,212

76,781

103,653

140,714

187,466

Current assets

 

 

57,739

68,578

61,903

67,310

81,138

Total assets

 

 

109,951

145,359

165,556

208,024

268,604

Current liabilities

 

 

(10,091)

(8,945)

(6,850)

(8,860)

(9,516)

Non-current liabilities inc prefs

(30,650)

(55,150)

(30,650)

(59,650)

(105,650)

Net assets

 

 

69,210

81,264

128,056

139,514

153,438

NAV per share (p)

588

689

1,084

1,179

1,297

CASH FLOW

Operating cash flow

 

 

(5,407)

(13,404)

(16,017)

(30,586)

(39,829)

Net cash from investing activities

(736)

(1,096)

80,716

(392)

(580)

Dividends paid

(5,664)

(6,734)

(23,090)

(9,558)

(11,289)

Other financing (excluding change in borrowing)

33

8

55

20

0

Net cash flow

 

 

(11,774)

(21,226)

41,664

(40,517)

(51,699)

Opening net (debt)/cash

 

 

(21,015)

(32,789)

(54,015)

(12,351)

(52,868)

Closing net (debt)/cash

 

 

(32,789)

(54,015)

(12,351)

(52,868)

(104,567)

Source: S&U accounts, Edison Investment Research. Note: Net debt includes £0.45m preference shares. FY16 DPS includes an exceptional payment of 125p. FY14 P&L figures include the discontinued home credit business and are therefore not comparable with subsequent years.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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

245 Park Avenue, 39th Floor

10167, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street,

Sydney , NSW 2000,

Australia

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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

245 Park Avenue, 39th Floor

10167, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street,

Sydney , NSW 2000,

Australia

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