19 October 2021
By Maynard Paton
Results summary for S & U (SUS):
- A record H1 profit performance supported by a “lower than normal” bad-debt provision and the dividend rebounding 50% to pre-Covid levels.
- The main car-loan division has recovered well from the pandemic, with collection rates (94%) and on-time first payments (98%) now standing at multi-year highs.
- The fledgling property-loan operation enjoyed a bumper six months following the government CBILS scheme.
- Interest charges at 3%, increased borrowing facilities and headroom of £65m indicate no obvious funding concerns.
- The £28 shares are close to an all-time high and may already reflect management’s webinar talk of car-loan volumes increasing 25% to 25,000 a year. I continue to hold.
- Event links, share data and disclosure
- Why I own SUS
- Results summary
- Revenue, profit and dividend
- Advantage Finance: Loan provisions
- Advantage Finance: Credit quality and payment holidays
- Advantage Finance: New loans
- Aspen Bridging
Event links, share data and disclosure
Event: Interim results and presentation for the six months to 31 July 2021 published 28 September 2021 and results webinar hosted 30 September 2021
Shares in issue: 12,145,260
Market capitalisation: £340m
Disclosure: Maynard owns shares in S&U. This blog post contains SharePad affiliate links.
Why I own SUS
- Provides ‘non-prime’ credit to used-car buyers and property developers, where disciplined lending and reliable service have supported an enviable dividend record.
- Boasts veteran family management with 40-year-plus tenure, 50%-plus/£170m-plus shareholding and a “steady, sustainable” and organic approach to long-term growth.
- Offers the prospect of improved progress post-pandemic based on enhanced credit scoring, extended marketing partnerships and promising diversification into property loans.
Revenue, profit and dividend
- Upbeat statements during May…
“Profitability for the period in our Advantage motor finance business and in Aspen, our property bridging arm, was ahead of group projections.“
- …and August…
“S&U continues to trade well, ahead of expectations in terms of profitability, collections and book debt quality.”
- …had already signalled these H1 2022 figures would reveal a welcome improvement on the pandemic-disrupted H1 2021.
- Revenue remained unchanged at £43m but pre-tax profit tripled to £20m to set a new H1 record:
- The profit rebound followed a “lower than normal” provision for potential bad loans and returned SUS to the (pre-pandemic) profit run-rate enjoyed during FY 2020.
- The comparable H1 2021 included an additional Covid-related loan provision of £14m, while this H1’s total provision was only £5m following “an excellent collections performance [that] proved the effect of the pandemic less severe than anticipated.“
- The provision fluctuation related entirely to Advantage Finance, the group’s car-loan subsidiary (see Advantage Finance: Loan provisions below).
- SUS’s property-loan division, Aspen Bridging, meanwhile enjoyed a bumper profit following its involvement in the Coronavirus Business Interruption Loan Scheme (CBILS) (see Aspen Bridging below).
- Group profit continues to be dominated by Advantage Finance:
- The finance director said during the results webinar that the “lower than normal” car-loan provisioning should extend into H2 but then “normalise” thereafter.
- As such, some of SUS’s financial ratios from this H1 may temporarily flatter the group’s performance.
- The 33p per share interim dividend compared to:
- 32p per share for the pre-pandemic H1 2019;
- 34p per share for the pre-pandemic H1 2020, and;
- 22p per share for the pandemic-hit H1 2021.
- The 50% rebound to a 30p-plus per share H1 payout therefore implied the business having passed the worst of the pandemic.
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Advantage Finance: Loan provisions
- Management describes Advantage Finance customers as ‘non-prime’ — “borrowers that have had a problem in the past but are on an upward trend” (point 3).
- Advantage borrowers traditionally took on car loans of approximately £6.5k, but rising used-car prices post-lockdown have increased the average loan to £7k:
- The flat interest rate charged by Advantage has meanwhile dropped below 17% for the first time since FY 2015.
- The lower interest rate was due to a smaller proportion of higher-risk Tier D and Tier E customers at the start of the year:
- Borrowing £7k at a flat 16.2% a year over 53 months leads to interest of £5k and a total repayable figure of £12k before administration and other fees.
- Before the pandemic, the average Advantage borrower would have repaid almost £10k of that £12k. But I estimate the repayment would have been less than £9k during the pandemic.
- The tone of management’s commentary for this H1 suggested repayments have returned to £10k.
- The chart below shows the impact of the extra £19.5m Covid-19 bad-debt provision (grey boxes) on Advantage’s profit during FY 2021:
- The ordinary provision (blue boxes) represented 13% of revenue for this H1 versus 19% for (pre-pandemic) FY 2020.
- Management said during the results webinar that its best guess of a “normal” bad-debt rate for Advantage would be a return to that 19% proportion of revenue.
- A “normal” 19% impairment rate for this H1 would have increased the loan provision by £2m to £7m and reduced group pre-tax profit from £18m to £16m.
- The additional Covid-related provisions from FY 2021 still sit on the balance sheet.
- At year-end FY 2020 (i.e. just before the pandemic), Advantage had lent £344m to customers of which £63m, or 18%, was provided for as a bad debt to leave the net amount receivable at £281m:
- For FY 2021 and this H1 2022 (i.e. following the pandemic disruption), a bad-debt provision of £93m represented 27% of the total approximate £340m loaned:
- That 27% proportion ought to reduce towards 18% as the effects of the pandemic subside over time.
- A higher proportion of the £93m bad-debt provision is now classified as Stage 1 versus Stages 2 and 3:
- Greater Stage 1 provisions ought to mean a lower rate of future defaults because:
- Stage 1 provisions reflect expected write-offs from newly opened accounts (i.e. without any history of arrears), while;
- Stage 2 provisions reflect expected write-offs from accounts that enjoyed an FCA-mandated payment holiday (i.e. technically in arrears), and;
- Stage 3 provisions reflect expected write-offs from accounts actually in arrears.
- The FY 2021 annual report (points 7 and 8) explains the three provision Stages in more detail.
Advantage Finance: Credit quality and payment holidays
- SUS’s collection rate should be its most important KPI, as customer repayments ultimately determine the extent of bad loans and the associated provisioning.
- SUS described its collections performance for this H1 as “superb” and said the collection rate, at 94.4% of due, was the highest since October 2017:
- Total collections, recoveries and settlements amounted to £100m for this H1 to match the pre-pandemic collection performance of H2 2020:
- SUS said the collection improvement was due to a mix of “responsible” underwriting, a new repayment portal and re-jigging collection-staff bonuses.
- Helping matters also were customers that enjoyed payment holidays now repaying at a greater rate.
- The pandemic prompted the FCA to allow borrowers to apply for payment holidays lasting up to six months. All payment holidays ended on 31 July 2021.
- During January 2021, customers exiting their payment holidays were paying 79% of due…
- …but by July 2021 they were paying 88% of due:
- Management said on the results webinar that the 16,257 payment-holiday accounts represented 20% — or £50m — of outstanding customer loans.
- Assuming an even split of loan size between payment-holiday accounts and non-payment-holiday accounts, payment-holiday customers may have borrowed £90m but will not repay £40m:
|Gross amount receivable (£m)||90||252||342|
|Net amount receivable (£m)||50||199||249|
- That earlier slide showed 36.24% of payment-holiday accounts were more than six months behind with their payments:
- With payment holidays lasting no more than six months, this 36.24% cohort appears not to have recommenced payments.
- Mind you, 90.87% of non-payment-holiday accounts were up to date — a very welcome proportion given the corresponding level for all accounts for pre-pandemic FYs 2019 and 2020 was approximately 80%.
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Advantage Finance: New loans
- The 9,697 motor loans issued during this H1 exceeded the number agreed during H1 and H2 2021:
- But SUS did admit industry supply problems had left used-car numbers at “extremely low” levels and in turn were limiting transaction volumes.
- Management nonetheless claimed during the results webinar that Advantage was “planning for an increase in volumes up towards 25,000 units” for FY 2023.
- 25,000 new loans a year would represent a 25% or so increase on the near-20,000 current run-rate.
- The 9,697 new loans issued during this H1 were offset by 10,534 accounts being closed due to finished repayments, voluntary terminations or commencement of legal proceedings:
- The account openings and closures meant total ‘live’ accounts remained around 61,000:
- Revenue per account continues to trend lower, with the latest reduction perhaps due to the aforementioned smaller proportion of higher-rate Tier D and E borrowers.
- Advantage’s first-payment statistics remain encouraging:
- The blue line (left axis) reflects the percentage of customers making their first payment on time.
- At 98%, the proportion is back to levels last seen on a regular basis five years ago.
- The unbroken red line (right axis) shows the actual ‘outcome loss ratio’, which correlates strongly to the first payment percentage.
- The dotted red line (right axis) shows the predicted ‘outcome loss ratio’, which has diverged slightly from the blue line to reflect the greater uncertainty of repayments following the pandemic.
- The gap between the blue line and the dotted red line is much closer than the same gap within the preceding FY 2021 presentation below…
- …and implies improved repayment levels ahead.
- Established at the start of FY 2018, Aspen offers property bridging loans aimed at small/individual property developers with awkward financial circumstances.
- Aspen’s rate card says customers borrowing against residential properties will pay a flat monthly interest rate of 0.69% on a 75% loan-to-value arrangement. These case studies give a flavour of the transactions involved:
- Aspen’s participation in the government’s CBILS scheme bolstered the division’s progress during this H1.
- Aspen agreed 22 CBILS loans totalling £35m (£1.6m average) alongside 44 standard loans totalling £29m (£668k average).
- Profit for this H1 was double that of the preceding 12 months at £1.5m:
- Aspen’s credit quality remains very good. Expected write-offs from the £58m loan book amount to just £554k.
- Mind you, SUS did admit Aspen’s previously default-free loan book now carried one account in default.
- Aspen’s enlarged loan book currently represents 19% of SUS’s entire lending.
- The cessation of CBILS is likely to mean Aspen’s H2 performance does not repeat this bumper H1.
- But management did claim Aspen has “great opportunities for growth” and that the half-year pipeline of future business was “about 15% above budget“.
- The size of Aspen’s agreements are increasing. Excluding CBILS, the average £668k loan agreed during this H1 compares to less than £600k during the preceding four years.
- Management comments on the results webinar sadly did not repeat the optimistic talk of the preceding FY 2021 webinar, which cited a £5m Aspen profit within 2-3 years.
- Management revealed during the results webinar that Aspen’s deputy chief executive, Jack Coombs, figured in the group’s succession planning.
- SUS’s lead executives — Anthony and Graham Coombs — are presently both 68 years old while their cousin Jack is 34.
- The Coombs family control more than 50% of SUS, with Anthony and Graham Coombs together owning 24% (£80m) and Jack Coombs holding a further 14% (£46m).
- Jack Coombs is already a board executive, and one day becoming the lead Coombs executive hints at Aspen becoming of greater importance to the group.
- Aspen’s increased lending was reflected by the £26m net cash movement of customer receivables:
- The additional lending of £26m as well as a £7m dividend required extra debt of £16m and left net debt at £115m.
- Bank interest during the six months was £1.8m, implying SUS’s borrowings incur interest at a reasonable 3.3%.
- The FY 2021 annual report (point 11) claimed SUS borrows money from banks at 4% to then lend out at 27%.
- The wide, 23% net interest margin is required to cover debt impairments and operating costs, and in turn earn a respectable return on the capital employed (pandemics aside).
- The H1 interest payment was covered a satisfactory 12x by operating profit.
- Net debt of £115m compares to the group’s £306m net loan book.
- SUS’s lenders do not seem too worried about the group’s borrowings. This H1 statement confirmed banking facilities had increased by £15m to £180m to give headroom of £65m, with maturity dates meanwhile ranging from 2024 to 2029.
- The presentation did not include the slide showing Advantage’s risk-adjusted yield and return on capital employed, so I have amended the last one (from FY 2020) the best I can:
- The aforementioned “lower than normal” impairment for Advantage has lifted the division’s risk-adjusted yield and ROCE, although this H1 statement did not allow the latter to be calculated properly.
- I am hopeful Advantage’s risk-adjusted yield and ROCE will eventually be sustained at pre-pandemic levels and the missing slide can then return.
- SUS maintains a tiny defined-benefit pension scheme that last carried a surplus (point 13).
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- Management gave a positive outlook:
“The Covid induced tribulations of the past year have seen S&U emerge more profitable, more competitive and more attuned to our customers ‘ needs. Add to that the buoyant markets in which we operate, our strongest ever financial base and our loyal and committed workforce, and prospects for the future are bright indeed.“
- The shares presently trade very close to an all-time high:
- Doubling up this H1’s performance but also:
- Applying management’s best guess of a ‘normal’ 19% car-loan impairment rate;
- Guessing Aspen’s ex-CBILS annual profit to be £1.5m, and;
- Applying tax at 19%…
- …leads to an operating profit of £34m and earnings of £27m or 224p per share.
- SUS’s enterprise value is £455m (£340m market cap plus £115m net debt), which is 17x my earnings guess.
- The present rating is not low by historical standards, but perhaps the market has warmed to management’s car-loan webinar comments of “planning for an increase in volumes up towards 25,000 units.”
- Arranging 25,000 car loans a year would lift the number of live Advantage accounts beyond 80,000 by 2025 assuming account closures remain at approximately 20,000 a year.
- 80,000 accounts delivering the present £1,238 annual revenue per account would produce total revenue of £99m.
- Then assuming:
- Car-loan impairments run at management’s best guess of a ‘normal’ 19%;
- Other car-loan costs rise in line with revenue;
- Property profit does indeed meet management’s webinar talk of £5m, and;
- Tax is 25%…
- …gives possible FY 2025 earnings of £35m or 285p per share.
- SUS’s current enterprise value is equivalent to 13x that £35m projection.
- For what they are worth, the forecasts displayed within SharePad predict a significant profit rebound:
- The 33p per share H1 dividend may herald a full-year payout of between 110p-120p per share if the 32p/34p per share payments of H1s 2019 and 2020 are anything to go by.
- The £28 shares could therefore yield 4.1%.
- Assessing the potential upside of the shares was easier this time last year when the price was £17 and a full pandemic recovery offered potential double-digit returns.
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