S & U: Final 2020 Dividend And No Furloughed Staff Underline Management Confidence Of ‘Non-Prime’ Customers Repaying Loans Totalling £302m

7 thoughts on “S & U: Final 2020 Dividend And No Furloughed Staff Underline Management Confidence Of ‘Non-Prime’ Customers Repaying Loans Totalling £302m”

1. S & U (SUS)

   Publication of 2020 annual report

   Here are the points of interest beyond those mentioned in the blog post above.

   1) Strategic report and review

   I did not know quoted companies are now obliged to produce a Section 172 report (see point 2):

   

   I note SUS now says a car loan ranges between £2k and £15k — last year the minimum was £3k.

   Also, 1 million used cars are financed on HP each year — the 2019 report said 900,000. The market size remains c£17 billion a year.

   The strategic review includes a new paragraph outlining the group’s “purpose and vision”

   

   The review covers commentary on electric vehicles. SUS believes such vehicles are unlikely to have a medium-term impact on trading.

   Other snippets include how Aspen may earn a “competitive edge“, the bridging-loan sector growth and a reminder of the group’s 80-year heritage and “business philosophy“:

   

   

   2) Section 172

   Here is the Section 172:

   

   No great revelations.

   3) Case studies

   For the third consecutive year, ‘Natalie’ at Advantage enjoys a namecheck in the annual report case studies:

   

   The timescales of the Aspen case study seem impressive:

   

   4) Risks

   No change to the principal risks section save for a line about Covid-19:

   

   I must admit this report did not really mention Covid-19. The audit report briefly touched upon the subject (see point 9) and this post balance-sheet event had to mention it as well:

   

   5) Ombudsman

   Formal complaints remain less than 100 a year:

   

   The HP rules mean SUS is on the hook for vehicle quality should the car be faulty at the point of sale.

   Would be useful to know the type of non-vehicle complaint that reaches the Ombudsman.

   6) Director pay

   I am never quite sure whether SUS really needs three executives on £300k-plus each:

   

   Mind you, the Coombs brothers have guided SUS well over time and perhaps the pay arrangements are required for the family to maintain the “steady, sustainable growth” approach.

   Allowances and benefits of c£40k seem chunky. The bonuses seem under control, although the small print does say the c£25k payments were “fair and reasonable” after profit before tax increased by 1.7%:

   

   The remuneration report reveals the PBT “stretch” target for 2020 was £36.5m — or growth of 5.6%.

   Bear in mind Guy Thompson, the MD of Advantage for the last 20 years, retired from the role and has since become a non-board “adviser”:

   

   Graham Wheeler, Mr Thompson’s replacement, is not (yet?) a board member and so his pay was not disclosed.

   The chairman enjoyed a 4.4% pay rise versus 5.2% for the wider workforce.

   The execs will enjoy up to a 3.3% pay rise for 2021.

   “Stretching” targets will be set for 2021, too.

   A new remuneration policy will be drawn up for next year to cover 2022, 2023 and 2024.

   Shareholders were mostly happy with the 2019 remuneration report:

   

   The chairman’s total pay has remained broadly similar during the past 10 years — so I can’t really gripe given how the company has performed in the meantime:

   

   7) Corporate governance

   A reminder that SUS is proud of its “family investment and management” and “non-bureaucratic” working culture:

   

   Confirmation, also, that the Coombs family owns a “majority holding”. The declared Coombs shareholdings total less than 50%.

   SUS deviates from corporate-governance guidelines because of the appointment of an executive chairman. The company makes a plea to corp-gov ‘box tickers’:

   

   A useful snippet that revealed Graham Wheeler, the new Advantage MD, was one of very few appropriate candidates for the job:

   

   Nice to see more audit meetings than remuneration meetings:

   

   9) Audit going concern

   Just a passing reference to Covid-19 from the auditor:

   

   I am hopeful this means shareholders should not be worried too much about the effect of the pandemic on SUS, but then again the auditors are no doubt guessing like everyone else.

   10) Audit materiality and scope

   Materiality at a standard 5% of profit and a 100% scope:

   

   11) Key audit matters

   The two key audit matters — calculating the loan-loss provision and revenue recognition — remain the same.

   But the auditors have been performing extra/revised checks on both. In particular, IT controls are tested:

   

   

   A line about Covid-19 was inserted, too. Not sure how the auditors could in reality challenge management’s view in what is an unparalleled situation.

   12) Audit tenure

   22 years and counting for Deloitte as auditor:

   

   The arrangement has to be put to tender by January 2024.

   13) Performance measurements

   A useful snippet that shows management thinking — a new performance measure for 2019:

   

   Perhaps no surprise that “group collections” have come to the fore now that Covid-19 may have increased the likelihood of defaults.

   14) Employees

   Nothing too concerning here:

   

   Total employee costs remain c10% of revenue. Average cost per employee was c£50k/year versus £45k for 2019 and £50k-plus for 2016, 2017 and 2018.

   Revenue per Advantage employee was £528k versus £498k for 2019, but below the £550k and £611k for 2017 and 2018.

   What is impressive was revenue per Advantage employee was below £300k for 2014 and earlier, so a vast productivity improvement was implemented from 2015 (at least according to my sums).

   15) Loan loss provisions

   Difficult to read too much into this note as the IFRS 9 format was introduced only last year. But two observations can be made:

   

   First, the ‘new loans originated’ lines. These represent the estimated charge for bad loans relating to new loans issued during the year (the figures relate almost entirely to motor loans).

   SUS advanced motor loans of £129m for 2019 and £149m for 2020.

   ‘New loan’ provisions of £11.8m therefore represented 9.1% of the advances for 2019.

   ‘New loan’ provisions of £14.5m therefore represented 9.7% of the advances for 2020.

   So a small percentage increase and nothing obviously too sinister, but something to monitor.

   Second, the ‘utilised provision on write-offs’. These represent loans that have actually been written off. When a loan is written off, the earlier estimated bad-loan provision is ‘utilised’ — i.e. is subtracted from the cumulative provision for estimated future bad loans (which for 2020 was £64.3m).

   Anyway, the ‘utilised provision of write-offs’ increased by 46% to £18.4m for 2020, which is a large leap. Perhaps these write-offs related to loans issued during 2018 or 2019, when the underwriting was not as tight as it should have been in retrospect. Again, another number to monitor. If the ‘utilised provision on write-offs’ keeps increasing at a significant rate and the overall loan loss provision decreases notably, then questions would be raised about the suitability of the provisioning estimates.

   16) Borrowings and interest

   Confirmation that SUS still borrows at 4% and lends at 28%:

   

   SUS paid interest of £4.7m during 2020 on average bank debt of £113m giving an effective rate of 4.2% — up from 4.1% for 2019.

   Certain loans have been extended or replaced after the year end:

   

   17) Options

   Not many outstanding options:

   

   I suspect the board’s new remuneration policy — to be set next year — will include a fresh LTIP scheme to motivate Graham Wheeler, the new Advantage MD.

   18) Pension

   No concerns here:

   

   This small scheme has assets of £1.1m and pays out benefits of £41k a year. The figures are trivial compared to the size of annual profits.

   Maynard

2. S & U (SUS)

   AGM Statement and Trading Update

   Here is the full text:

   ————————————————————————————————————
   S&U, the motor finance and property bridging lender, issues a trading update for the period 1 February 2020 to 8 June 2020 prior to its AGM today. Covid-19 restrictions dictate a closed AGM, but the company will be holding a question and answer session for shareholders today at 2pm and details are in the notice of AGM.

   In our Chairman’s Statement of 8th April, the Group withdrew future market guidance due to the uncertainty regarding Covid-19’s future impact.

   The current economic recession brought about by the Covid-19 lockdown and the uncertain path out of it confirms our decision on future guidance, although we aim to update the market further in our trading update on 11th August 2020.

   What is clear, however, is that S&U has been able to protect the safety and morale of our employees and the operations which depend upon them. All are safe and have adapted very well to working from home, so that we are proudly amongst only a fifth of firms in the UK who have not relied upon Government support during the epidemic. Nevertheless, the plunge in the economy and the long-term effects caused by Covid-19, and by the Government’s actions to overcome it, have understandably affected our customers.

   Advantage Finance

   Thus, at Advantage, our motor finance operation, sales initially fell to just 15% of normal levels as car dealers and broker introducers closed, deliveries ceased and car usage plummeted. In addition, Advantage sensibly restricted the categories of customer it was prepared to approve, restrictions which are likely to remain in place given the current uncertainties regarding employment and the labour market. Nevertheless, transactions have now steadily recovered to just over nearly 40% of normal. This improvement is expected gradually to continue as car sales outlets re-opened last week.

   Similarly, collections have been affected by both lower consumer confidence and by the FCA measures put in place at the end of April offering borrowers a repayment “holiday” of up to 3 months. Whilst this remains under review it was both impulsive and, given the lenders’ responsibilities under CONC and Treating Customers Fairly principles, unnecessary for consumer protection. The effect so far is to see regular monthly collections fall in the most recent month by about 20%. Over the period as a whole, regular monthly collections reduced by about 9%. New “holiday” applications are now dwindling; these have accounted for virtually all of the short fall experienced in monthly collections and these are now stabilising.

   Whilst these trends have yet to have their expected effect upon either bad debt or voluntary terminations, future collections and hence our provisioning for book debt impairment will largely be determined by the speed of economic recovery; in turn this will depend upon the extent of the labour market shake out after furlough measures come to an end. In the meantime, additional impairment provisions are being made which will inevitably have a significant effect on Advantage results this year.

   Aspen Bridging

   At Aspen, our property bridging business, greater optimism in the residential property market following the General Election result late last year, has been deflated by Covid-19, although, given the fundamentals under-pinning the residential market, it has not dissipated entirely. Thus, whilst transaction numbers have been under a quarter of those budgeted this year, recent applications have been robust allowing a good quality pipeline to increase. These trends are reflected in recent Right Move statistics on housing enquiries released late in May.

   Better sentiment has also seen regular collections beating budget, whilst a longer “tail” of late or defaulted cases has also recently shown a promising reduction. Nevertheless, we remain sensibly cautious in our new business approach.

   Treasury

   The operational sustainability of our business continues to be reflected in our strong treasury position. As predicted, recent cash generation has seen group borrowings fall to £98m, some £30m less than budget. Gearing is now around 55%. We have therefore taken the opportunity to repay £25m of group facilities slightly early, which reduces financing costs and still leaves over £30m of headroom.

   Commenting on S&U’s trading outlook, Anthony Coombs, S&U Chairman said:

   “Given the challenges surrounding the economy and the future direction of the labour market, it would be unwise to attempt specific predictions. S&U’s conservative style of management, its strong treasury position and most of all the dedication and flexibility of our people and their relationship with our customers, will now pay dividends, both literally and figuratively. Despite the current uncertainties we face the future with our usual confidence and determination.”
   ————————————————————————————————————

   The key parts are Advantage and Treasury.

   Advantage collections were down 9% for February to May and down 20% for May. My sums indicate February, March and April must have seen collections down 5% on average to arrive at the four-month 9% decline. February was pre-lockdown, so if collections for that month were flat on 2019, then perhaps March collections fell 5% and April collections fell 10% to arrive at the four-month 9% decline.

   SUS is clearly not happy with the repayment “holidays”, which will last until July and presumably ensure collections will continue to run at 20% lower than last year for June and July. What happens beyond then remains guesswork.

   Missing from the statement are references to risk-adjusted yield and customer receivables — figures that are regularly cited within trading updates (for example last year’s AGM statement).

   No doubt the figures were not revealed this time because “additional impairment provisions are being made which will inevitably have a significant effect on Advantage results this year.”

   “are being made” is the crucial point — the text reads as if the impairments are only now being determined. I guess management does not want to commit to any figures at this stage because the situation remains unpredictable. The directors also enjoy four months of breathing space before determining the impairments for the half-year release in September.

   The Treasury numbers reveals some clues as to what has happened.

   Group borrowings of £98m compare with £119m at the January year-end, so a difference of £21m. A dividend of 36p per share — £4m — was paid in March, so free cash flow during the four months was £25m.

   Gearing of 55% implies a net asset value of £98m/0.55 = £178m — in line with the £179m at the January year-end.

   SUS’s asset base must therefore be £178m + £98m = £276m — which is mostly represented by outstanding customer loans.

   Outstanding loans at the January year-end were £302m. So customer loans have decreased by £302m less £276m = £26m during the four months. £26m is 9% of £302m, so the reduction reflects the 9% reduction to collections.

   The £26m decrease comprises new loans issued less any extra loan-loss provisions (net of write-offs) less repayments made. Unpicking those finer loan movements is impossible.

   I have to confess I can’t really be sure if SUS is coping well with Covid-19 or whether the numbers in this statement are hiding problems.

   Probably the most encouraging line from the statement is “Nevertheless, transactions have now steadily recovered to just over nearly 40% of normal.”. That suggests the market for used-car finance is recovering even with SUS’s tighter underwriting criteria, implying the sector/economy has not died just yet and suggesting perhaps collections from existing borrowers may improve over time.

   Maynard

3. Thx for update, really do appreciate all the effort.
   One humorous typo re Deloitte “The arrangement has to be put to tender by January 20204”

   • Thanks Robbins. Good spot
     Maynard

4. S&U (SUS)

   Trading update published 11 August 2020

   Not a bad statement in the circumstances. Here is the full text interspersed with my comments:

   —————————————————————————————————

   “S&U PLC, the motor finance and property bridging specialist, today issues a trading update for the period from its AGM statement of the 9th June to the 31st July 2020. It will announce half year results on the 30th September 2020.

   Trading

   It is barely two months since our AGM Trading Update in June and our business continues its steady recovery from the economic shocks initially caused by Covid-19, and the Government’s measures to combat it.

   As we adjust to a gradual but uneven easing of the Lockdown, and trading volumes return nearer normal, we still feel it wise at present not to issue forward guidance. In changing times, it is wise to recall Mark Twain’s admonition — “It ain’t what you don’t know that gets you into trouble, but what you know for certain that just ain’t so”.

   The mood of the British consumer is still skittish and cautious. Although recent manufacturing and financial services sectoral surveys are encouraging, uncertainty still persists about both the state of the labour market as Government support measures are dismantled, and about the deeper structural effects on the economy caused by the pandemic. We anticipate greater clarity over the next three months.

   Although these trends will inevitably have a significant impact on S&U’s results this year, the Company is still profitable, paying dividends and our financial strength, experience, excellent broker partnerships and flexible and committed staff should ensure a return to a more “normal” trading environment by the end of the year.
   —————————————————————————————————

   “Steady recovery”, “paying dividends” and “a return to a more “normal” trading environment by the end of the year” does not sound too catastrophic.

   —————————————————————————————————
   Advantage Finance

   As more car sales outlets recently returned to business, so sales at Advantage Finance (‘Advantage’) have recovered from around 40% of normal to nearly 80%. Loan applications are at a record high but our policy of early tightened under-writing, and a focus on customer quality has seen current transaction levels 25% less than last year.

   This has produced improved early repayments, indicative of the high quality of the new customers taken on since Covid began. In the medium term this may offer the kind of significant market opportunities in the near prime field from which Advantage benefitted following the banking crisis of a decade ago.

   Although collection levels this year have fallen from their usual 94% of due to just over 75%, this has entirely been brought about by the FCA mandated customer repayment “holidays”. These have involved around 16,500 or 26% of our 63,500 customers.

   Although these customers are now gradually resuming repayment, the extent to which they do so — particularly in light of the further “holidays” of up to three months recently proposed by the FCA – will become clearer in the next couple of months. Current early indications make us cautiously optimistic.

   In the meantime, Advantage has continued to minutely analyse customers by income, expenditure type, headroom and previous credit history, so that we can anticipate, focus on and assist those who may struggle to return to contractual terms.
   —————————————————————————————————

   Again, the following does not seem too catastrophic:

   “our policy of early tightened under-writing, and a focus on customer quality has seen current transaction levels 25% less than last year. This has produced improved early repayments, indicative of the high quality of the new customers taken on since Covid began”

   What counts for this year is collections. 26% of customers enjoying payment holidays is not ideal, but not a lot SUS can do given the FCA instructions on the matter. This line — “Current early indications make us cautiously optimistic” — provides encouragement that customers returning from payment holidays will mostly resume payments.

   Note that SUS’s trading updates typically reveal Advantage customer numbers and occasionally refer to credit quality. None of those stats were divulged this time. Next month’s results will reveal all.

   —————————————————————————————————
   Aspen

   Although activity in the housing market over the past two months has been similarly restrained by the febrile UK economy, Aspen has seen an uptake in both new transactions – with July being above budget — and in recent loan redemptions. As the current deals pipeline slowly improves, current net receivables are just below £19m compared to £15.5m in early June.
   —————————————————————————————————

   Seems reasonable in the circumstances.

   —————————————————————————————————
   Treasury

   Group borrowings are £108m against £98m in June and reflect both the payment of our final dividend and slightly stronger sales growth at Advantage. We conduct regular scenario planning reviews to anticipate funding requirements over the next 4 years. With existing committed facilities of £130m, significant headroom will be maintained and further medium-term funding obtained as required.
   —————————————————————————————————

   The final 50p per share dividend cost £6m, so the underlying business therefore absorbed extra cash of £4m to extend net debt by £10m. June’s AGM statement revealed net debt had been reduced by c£20m since the 2020 year end as the business focused on collections, so hopefully the underlying £4m increase since June does indeed reflect “stronger sales growth at Advantage” and not collections going awry.

   —————————————————————————————————
   Commenting on the Group’s trading and outlook, Anthony Coombs, S&U chairman, said:

   “First and foremost, I take this opportunity to record our thanks to, and admiration for, the spirit, flexibility and sheer determination of our staff to maintain our standards of customer service during unprecedented and trying times. Although recent trading trends have been encouraging, the level of uncertainty surrounding the economy, the direction of Covid-19 and the effect that it has on customers’ confidence make prudence paramount.

   “What we can say for certain, is that S&U continues to make profits and has the experience, the financial resources, skilled people and tried and tested business philosophy needed to weather any further economic storms — and the ambition to grow strongly again when it is sensible to do so.”
   —————————————————————————————————-

   Encouraging to read the seasoned Mr Coombs can “say for certain” that SUS continues to make profits!

   Maynard

5. Hi Maynard,
   Thanks for the detailed analysis of this share. I continue to be impressed by the way management run this business and the strong long term shareholder alignment offered by the Coombs’ interests.
   One question I have which if you can shed light on is the near 20% shareholding of Wiseheights Ltd. Do you know anything about this shareholder from previous interaction with the business? There are some detailed accounts on companies house which indicate that dividends from shareholding is the major source of income.
   All the best and thanks again

   • Hi James

     Thanks for the message. Wiseheights (under different names) has been a c20% shareholder since at least 1985. The charity was gifted its shares (by whom I do not know) and S&U is the only investment. Wiseheights was not mentioned in the capital markets presentation I attended last year, and I know nothing beyond the Companies House documents.

     Thanks
     Maynard

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