Advantage was established during 1999 and managing director Guy Thompson has overseen the subsidiary’s 20-year history of consistent profit growth.
The 2018 annual report (point 6) revealed what I thought was “a lucrative ‘shadow share-option’ carrot to defer [Mr Thompson’s] retirement for a few years”.
Sure enough, Mr Thompson has decided to retire.
Management announced: “There is, however, a tide in the affairs of man which means that Guy will retire next year. His will be a hard act to follow, but in Graham Wheeler we believe we have found a worthy successor as CEO of Advantage.”
SUS issued the following bio for Mr Wheeler:
“Graham has dedicated his working life to the UK motor finance industry. He began his career with GMAC and was part of the original team at GE Capital Motor Finance in 1990. Joining Volkswagen Financial Services (“VWFS”) as an Area Manager in 1995, Graham rose to be CEO of VWFS UK, transforming it into Britain’s largest car finance business with a combined asset base of £13bn and over one million customers.”
“Graham later became Jaguar Land Rover’s Director for Global Financial Services and then developed a digital car financing business for Shawbrook Bank. In 2018 he was inducted into the International Asset Finance Network Hall of Fame”
Mr Wheeler’s record at Volkswagen Financial Services UK appears impressive.
Between Mr Wheeler’s appointment as a director in 2004 and departure in 2016:
The proportion of VW cars bought using VW finance climbed from 12% to 47%;
The number of loans issued climbed from 75k to 328k a year;
The amount of money loaned climbed from £869m to £6,181m a year, and;
Mr Wheeler appears to be a ‘heavyweight’ industry appointment — although whether the lending culture at Advantage mirrors that at Volkswagen UK remains to be seen.
Management said at the May presentation that Advantage “sells to people, not algorithms”. I trust Mr Wheeler can continue the same approach.
Let’s hope Mr Wheeler does not attempt to introduce personal contract plans (PCPs) — a car-loan product that has been investigated by the financial regulator, but not something ever offered by Advantage.
According to Aspen’s website, a winter special offer allows customers to borrow at approximately 0.5% a month for the first half of their loan term, before reverting to 1.25% a month.
Aspen’s revenue and profit grew approximately 75% from the comparable H1 2019 performance:
Pre-tax profit (£k)
The growth was driven by total outstanding bridging loans (less impairments) advancing by £9m to £25m during the previous twelve months.
However, management confessed “competition and a prudent approach to valuation” had led to transaction volumes being “slightly short of expectations”.
The division had only 64 outstanding loans at the half year, of which nine involved slower-than-expected “borrower exits” (i.e. tardy payers).
Aspen has issued 137 loans to date and — impressively — only one has concluded at a loss.
Aspen’s £318k ‘loan provision’ was triple that recorded for H1 2019.
Loan provision (£k)
Average customer loans (£k)
Loan provision/Revenue (%)
Loan provision/Average customer loans (%)
Revenue/Average customer loans (%)
'Risk-adjusted yield' (%)*
The increased provision for possible bad debts represented 15.3% of revenue — versus c7-8% during 2019.
Greater revenue (i.e. interest) earned from bridging loans appeared to counterbalance the higher loan provision.
Revenue represented 19.3% of average bridging loans outstanding during the half, versus 17.5% for H1 2019.
The (apparent) higher rate of interest paid by Aspen’s borrowers meant the division’s ‘risk-adjusted yield’ of 16.3% broadly matched that reported for 2019.
Earlier this year, management anticipated “controlled revenue growth at Aspen of at least 50% per year over the next two years.”
But the 50% projection was not repeated this time.
Management nevertheless remained bullish on Aspen’s near-term future: “The current pipeline augurs a good second half, and a significant contribution by Aspen to Group profits in the next two years.”
Management has not specified how significant a “significant contribution… to Group profits” could actually be.
For this H1, Aspen contributed 3% of group profit.
Assume 10% of group profit, and Aspen would have to contribute £3.8m given pre-tax profit from Advantage currently runs at £34m a year.
The hope — which may be wildly optimistic — is that Aspen becomes another Advantage, and goes from start-up to a £34m annual profit within 20 years.
The 2019 annual report (point 11) shows SUS borrows money from mainstream banks at 4% to then lend out at 30%.
The wide net interest margin is needed to cover debt impairments and operating costs.
A 41% operating margin for this H1 compares to 42%, 41% and 44% for H1s 2019, 2018 and 2017 respectively.
SUS requires a high level of profit to generate a respectable return on the capital that supports the business.
My year-end 2019 sums indicated SUS enjoyed a return on capital (equity plus debt) of approximately 12% after tax.
SUS calculates the return on capital employed (ROCE) within Advantage to be 15% before tax (blue line):
SUS’s net debt stands at £125m, just £4m higher than at this point last year.
The modest increase to borrowings reflects cash flow during H2 2019, when Advantage’s application criteria were tightened and more loans were repaid than issued. Operating cash flow during H2 2019 was a positive £17m:
Operating profit (£k)
Working-capital movement (£k)
Other cash-flow movements (£k)
Operating cash flow (£k)
In contrast, this H1 witnessed operating cash flow of negative £7m after an extra £21m was absorbed into working capital (to fund new customer loans).
Interest payments of £2.3m were covered a respectable 8-9x by operating profit during the six months.
SUS maintains a tiny defined-benefit pension scheme that last carried a surplus.
SUS ended the half with total outstanding customer loans of £298m.
During the preceding twelve months, SUS earned revenue equivalent to 32.0% of outstanding customer loans.
Multiply £298m by 32.0% gives possible revenue of £95m for the next twelve months.
During the preceding twelve months, SUS also recorded:
A bad-debt impairment provision equivalent to 25.1% of revenue;
Other cost of sales equivalent to 18.8% of revenue, and;
Administrative expenses equivalent to 13.1% of revenue.
Potential revenue of £89m less those percentage charges would leave a potential £41m operating profit.
Applying the 18% tax used in these results to a potential £41m operating profit delivers possible earnings of £34m or 278p per share.
Adding the £125m debt to the current £249m market cap gives an enterprise value (EV) of £374m or £31 per share
Dividing the £31 EV per share by my 278p EPS guess leads to a multiple of 11.1x.
The 120p per share trailing dividend supports an appealing 5.8% income.