S & U: £22 Shares Valued At Potential 1.15x NAV With 6% Yield After Positive FY 2023 Shows New ‘A Gold’ Borrowers And ‘Excellent’ Collections Supporting Healthy 18% Motor Loan-Book Growth

29 September 2023
By Maynard Paton

FY 2023 results summary for S & U (SUS):

• A seemingly lower-than-normal bad-debt charge underpinned a very positive FY, which compounded net asset value (NAV) to a fresh £18.51 per share high and the dividend to a fresh 133p per share high.

• New “A Gold” borrowers, rising used-car prices, bumper application numbers, “excellent” collection rates and waning pandemic issues led to healthy motor-finance progress, with a net loan book up 18%.

• A “sparkling” property-finance performance witnessed a 78% net loan-book surge and impairments kept to a minimum, although the division’s returns on capital remain very modest.

• Higher interest rates will hurt near-term margins and slow NAV growth, but debt costs remain amply covered by the estimated 20%-plus returns earned through the group’s most reliable customers.

• Post-results updates acknowledging reduced lending and “economic headwinds” leave the £22 shares trading at a possible 1.15x NAV and supplying a useful 6% income. I continue to hold.

Contents

• News links, share data and disclosure
• Why I own SUS
• Results summary
• Revenue, profit, net asset value and dividend
• Advantage Finance: Loans
• Advantage Finance: New loans and first payments
• Advantage Finance: Collections
• Advantage Finance: Overdue accounts and payment holidays
• Advantage Finance: Provisions
• Aspen Bridging
• Financials: Cash flow and debt
• Financials: Returns on capital employed, loan capital and equity
• Financials: Employees and margin
• Valuation

News links, share data and disclosure

• Annual results, presentation and webinar for the twelve months to 31 January 2023 published/hosted 28 March 2023
• AGM trading update published 25 May 2023
• Trading statement published 10 August 2023

Share price: 2,200p
Share count: 12,150,760
Market capitalisation: £267m

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 illustrious NAV and dividend record. 

• Boasts veteran family management with a 40-year-plus tenure, 42%-plus/£111m-plus shareholding and a “steady, sustainable” and organic approach to long-term expansion.

• Higher-quality borrowers, bumper application numbers, rising used-car prices and tighter lending criteria offer the prospect of resilient group progress during a potential difficult economy.

Further reading: My SUS Buy report | All my SUS posts | SUS website

Results summary

Revenue, profit, net asset value and dividend 

• A promising update during December…

“S&U continues to trade well despite a period of economic and political chaos unprecedented in most of our lifetimes. A change of government and of economic strategy, rising inflation, taxation and interest rates and an incipient recession is not exactly the ideal economic landscape for any business.

Nevertheless, trading is very good, focusing on the excellent quality of our customer relationships and the receivables which we derive from them. These receivables have now reached a net c£404m, against £370m at the half year end with continued good collections and profitability during the period.”

• …followed by upbeat commentary during February…

“Current trading in both businesses, Advantage, our motor finance lender, and Aspen , our property bridging lender, remains excellent. This will be reflected in the full year’s results which are expected to both meet expectations and exceed budget.

• …had already forecast a very positive FY 2023.  

• As heralded within February’s statement, this FY did indeed show net receivables at c£420m and net debt at £192m. 

• Revenue improved 17% to £103m to set a new FY record:

• H2 revenue advanced 18% to £53m to set a new record for any H1 or H2.

• Pre-tax profit meanwhile slipped 12% to £41m:

• The lower profit followed significant fluctuations to the bad-debt impairment charge within SUS’s motor-loan subsidiary Advantage Finance (see Advantage Finance: Provisions).

• To recap, FY 2021 suffered an additional Covid-related loan provision of £20m, while FY 2022’s entire provision was only £4m after better-than-anticipated collections prompted a significant reversal of that extra £20m:

• Management’s FY webinar revealed FY 2021 with hindsight ought to have provided “roughly” an extra £5m — rather than £20m — for additional Covid-related bad debts for that year.

• As such, the bad-debt impairment for the comparable FY 2022 with hindsight ought to have been approximately £15m greater at £19m…

• … and therefore FY 2022 pre-tax profit with hindsight ought to have been approximately £15m lower at £32m:

• Pre-tax profit for this FY may therefore have gained 29% based on FY 2021 applying the £5m with-hindsight Covid impairment and FY 2022 then experiencing no Covid-impairment reversals.

• Note that management’s FY webinar also claimed this FY’s £14m total impairment charge was not flattered by further reversals of the original £20m Covid-related write-offs.

• Prior to the pandemic, SUS’s impairment charge was approximately £17m a year and the group explained this FY’s £14m impairment was due to all-round “careful, experienced and watchful underwriting“. 

• SUS compared this FY’s profit performance to the average of FYs 2021 and 2022:

“Despite the maelstrom of a European war, political upheaval in Britain and rising inflation, taxation and interest rates, S&U has produced profit before tax of £41.4m, fully 27% up on the average of the last two pandemic years, and the highest ‘normalised’ profit in its over eighty-year history.“

• The accounts continue to be dominated by Advantage Finance, although SUS’s property-loan division, Aspen Bridging, is becoming a greater part of the group:

• This FY witnessed the net motor-loan book advance a healthy 18% to £307m and the net property-loan book surge a bumper 78% to £114m.

• Factor in extra debt, and the larger loan books increased net asset value (NAV) by £18m to £225m — equivalent to £18.51 per share and a fresh NAV record. H2 added an extra £13m or £1.02 per share.

• NAV per share has gained 45% during the last five years and supports 84% of the £22 share price (see Valuation):

• The profit outcome prompted the final dividend to be lifted 5% to 60p per share, which took the full-year payout to a record 133p per share.

• Companies House shows the payout expanding 53-fold since 1987, with the sole reduction occurring during pandemic-blighted FY 2021:

Advantage Finance: Loans

• SUS describes Advantage Finance customers as ‘non-prime’ and the 2023 annual report outlines their typical circumstances:

“This long experience has enabled Advantage to gain a significant understanding of the kind of simple hire purchase motor finance suitable for customers in lower and middle-income groups. Although decent, hardworking and well intentioned, some of these customers may have impaired credit records, which have seen them in the past unable to access rigid and inflexible “mainstream” finance products.”

• Loan sizes have increased over time. The average amount borrowed surpassed £5k during FY 2012, £6k during FY 2015, £7k during FY 2022 and reached £7.8k during this FY:

• Management’s FY webinar said this FY’s greater loan size reflected rising used-vehicle prices and additional higher-quality customers, “who tend to borrow more money“.

• SUS said the average used-car price was advancing at 3% a year and had almost doubled since 2012:

“Whilst prices rose year on year by 11% to mid-2022, as supply increased this rise is now around 3% per annum. Indeed the average price of a used car has risen from £9,000 in 2011 to £17,600 in 2022.“

• Advantage’s higher-quality customers were reflected by SUS introducing a new “A Gold” tier for this FY:

• These “A Gold” borrowers appear to have been rejected by high-street banks:

“Moreover, as was seen in 2007–2009 in the “Great Financial Crisis”, near prime customers are being rationed and restricted by “mainstream” finance providers, enabling Advantage to attract them at sensible rates of return.“

• Reflecting the higher-quality customers, the flat 16.3% interest rate charged by Advantage during this FY matched the 16.3% charged during FY 2022 — and remained the lowest rate charged for at least twelve years:

• The duration of the typical loan continues to increase. The 54 months for this FY compares to 50 for FY 2017 and 44 for FY 2012.  

• Borrowing £7.8k at a flat 16.3% a year over 54 months leads to interest of £5.7k and a total repayable of £13.5k before administration and other fees.

• The revamped Advantage website cites a representative APR of 33.87%:

Advantage Finance: New loans and first payments

• The 23,922 motor loans issued during this FY were Advantage’s highest bar FY 2018 (24,518):

• The 12,122 new loans issued during H2 were a H2 record and only 420 short of beating the record H1 2018 (12,542).

• SUS confirmed no shortage of loan applications:

“Whilst in 2012 just 23% of used car sales were on finance, this is now 45% (Autotrader). The number of people searching for online finance is up 28% on pre-pandemic levels. Although transactions in 2022 have not yet reached pre-Covid levels, the market remains buoyant. This is most graphically illustrated at Advantage where loan applications have reached over 2.5m for the first time this year. “

• 2.5 million applications compares to over 1 million applications received during FY 2019 and 500,000 received during FY 2016.

• 90% of loans continue to be sourced through brokers. Cost of sales per loan (largely commissions to brokers) at £907 equated to 11.6% of the £7.8k average loan and was the lowest proportion since FY 2018 (11.1%):

• Issuing 23,922 loans from 2.5 million applications equates to less than a 1% conversion rate, which underpins the notion of very selective lending and Advantage’s claims of “intelligent underwriting” and a “habitually conservative Credit Committee“.

• The 23,922 new loans issued during this FY were offset by 20,730 accounts closed due to completed repayments, voluntary terminations or the commencement of legal proceedings:

• The account openings and closures left total ‘live’ accounts up 3,192 at 65,223, with 2,217 added during H2:

• The aforementioned higher loan sizes translated into revenue per account increasing to approximately £1.4k (the highest since FY 2019), with the average amount outstanding (before provisions) now at a new £6.2k high and the average amount outstanding (after provisions) at a new £4.7k high.

• Advantage’s first-payment statistics remain within levels witnessed before the pandemic:

• The blue line (left axis) reflects the percentage of new customers making their first payment on time.

• The proportion at between 95.5% and 97.5% during this FY was enjoyed between (pre-pandemic) October 2015 and October 2019.

• The 98%-plus first-time payments achieved during 2020 and 2021 were due to the stringent lending applied as Covid-19 struck. 

Advantage Finance: Collections

• SUS said Advantage’s collections during this FY were “excellent” and ahead of budget:

“In collections Advantage had an excellent year producing live repayments at a record £161.8m (2022: £152.7m). Advantage’s collections as a percentage of due reached 93.6% which beat both budget and last year.” 

• Collections at 93.6% of due compares to 93.2% for FY 2022, 83.3% for FY 2021 and 93.5% for (pre-pandemic) FY 2020.

• Mind you, collections were 94.2% of due during H1 which implies collections were lower at approximately 93% during H2:

• Similar to the collection performance, the amount of cash collected, the number of bad debts incurred and the number of voluntary terminations handled were all better than expected:

• Collections, settlements and recoveries for this FY amounted to £216m, up 6% on the comparable FY 2022 and split evenly between H1 and H2:

• Collections, settlements and recoveries as a proportion of gross receivables (i.e. loans before provisions) and net receivables (i.e. loans after provisions) were 57% and 76% respectively, and broadly matched pre-pandemic norms:

• Collections, settlements and recoveries continue to surpass the amounts used to fund new motor loans:

• Advantage’s estimates of future collections have been revised slightly:

• The payback percentage of loans has deteriorated over time. Collecting between 133% and 136% of the original loan remains some way off the 150%-plus collected for money lent between FYs 2010 and 2014:

• SUS expects customers to eventually repay 133% of the loans advanced during this FY, which will be the lowest payback percentage since FY 2008 if the estimate proves accurate.

• Note that for (pandemic-blighted) FY 2021, SUS initially estimated a 131% payback percentage for that year’s loans… which has since been uplifted to 137%.  

• I am hopeful SUS is once again ‘under-promising’ for an ‘over-delivery’, although the downward trend of the payback percentage — especially post-pandemic — does appear awkward. 

• Potential explanations for a 133% estimated payback include:
  • Worries about an uncertain economy and collection rates, and;
  • Lower interest being paid by a greater proportion of (higher-quality) borrowers. 

• Management’s FY webinar sadly did not refer to the payback percentage’s downward trend.

Advantage Finance: Overdue accounts and payment holidays

• 76% of Advantage’s loans boasted up-to-date repayments at the end of this FY:

• The up-to-date 76% remains skewed by customers that enjoyed an FCA-authorised payment holiday during the pandemic.
  • Payment holidays lasted up to six months and all payment holidays ended on 31 July 2021.

• SUS deems customers that took a payment holiday as ‘overdue’, even if they have repaid as normal following their payment holiday.

• The 76% improves on the 62% for FY 2021 and 69% for FY 2022:

• But the up-to-date proportion was 79% for FYs 2019 and 2020, topped 80% for FYs 2017 and 2018, and reached a super 91% for FY 2016. 

• 7,843 payment-holiday customers were still active at the end of this FY, versus a peak of 18,768 at the end of FY 2021:

• 5,375 payment-holiday customers cleared their accounts (one way or another) during this FY, with 2,502 disappearing during H2. Payment-holiday customers may therefore have all vanished from the loan book within 18 months.

• SUS no longer discloses detailed payment-holiday statistics, although did divulge payment-holiday accounts represented 6.2% of loans before provisions — equivalent to £25m. SUS had previously never disclosed the total amount owed by payment-holiday accounts.

• Payment-holiday accounts were paying 95% of due during the preceding H1 2023 and 97% of due during the comparable FY 2022, suggesting the remaining 7,843 payment-holiday accounts ought not to be too troublesome with their repayments.

• Bolstered perhaps by higher-quality “A Gold” borrowers, the average loan outstanding at up-to-date accounts is now £1k greater than the average loan outstanding at overdue accounts:

Advantage Finance: Provisions

• SUS’s loan provisions are classified as:
  • Stage 1, which reflects expected write-offs from newly opened accounts (i.e. accounts without any history of arrears);
  • Stage 2, which reflects expected write-offs from accounts not in arrears but which experience “some form of forbearance” that creates a higher credit risk (e.g. accounts that enjoyed an FCA-mandated payment holiday due to the pandemic), and;
  • Stage 3, which reflects expected write-offs from accounts one month or more in arrears.

• Advantage’s total bad-debt provision increased by £5m to £96m:

• Stage 1 provisions represented 28% of all provisions versus 21-22% for pre-pandemic FYs 2019 and 2020, which may suggest new loans are more likely to fall into arrears.

• Mind you, Stage 3 provisions represented 72% of all provisions versus 78-79% for pre-pandemic FYs 2019 and 2020, which indicates a lower proportion of loans actually in arrears.

• The £96m bad-debt provision was equivalent to 24% of the total £403m lent originally and still outstanding:

• The proportions for FYs 2021 and 2022 were 27% and 26% respectively.

• For pre-pandemic FYs 2019 and 2020, though, Advantage’s provisions ran at 18% of total money lent.  But Advantage’s provisions did touch 30% during FY 2012.

• Lending £403m and providing for £96m means Advantage expects to receive 76p of capital for every £1 currently loaned.

• The 24% proportion of bad debt justifies the aforementioned 16.3% flat-rate interest that ensures a suitable overall return from capital lent (see Financials: returns on capital employed, loan capital and equity)

• The proportion of bad debt reducing from 26% to 24% for this FY reflects Advantage lending an extra £53m versus the total loan provision increasing by only £5m.

• A few more years of lending £53m and increasing the total loan provision by only £5m (c9% of that £53m) would be very welcome.

• The last time Advantage’s total loan provision increased by less than 10% of the additional loans was FY 2016 (£3m versus £42m, or 7%).

• Advantage charged a £13m motor-loan provision against earnings that compared to £17m during pre-pandemic FYs 2019 and 2021:

• The difference between the £13m earnings provision and the £5m added to the total provision effectively represents £8m of past provisions utilised during this FY (i.e. loans written down to zero). 

• Management’s FY webinar said the £13m earnings provision was not influenced by reversing the additional Covid-19 provisions made during FY 2021 (see Revenue, profit, net asset value and dividend).

• However, SUS did admit the £13m provision was “still lower than normal” after “increase[s] in stage 1 and macroeconomic overlays for forecast future inflation and car prices [were] more than offset by excellent collections and lower than anticipated realised bad debts“.

• The “macroeconomic overlays” refer to IFRS 9 calculations that estimate expected losses, which the accounting notes acknowledge are derived with a “more heightened risk of an adverse economic environment“: 

“As required under IFRS9 the expected impact of movements in the macroeconomy is also reflected in the expected loss model calculations. For motor finance, assessments are made to identify the correlation of the level of impairment provision with forward looking external data regarding forecast future levels of employment, inflation, interest rates and used car values which may affect the customers’ future propensity to repay their loan.

The macroeconomic overlay assessments for 31 January 2023 reflect that further to considering such external macroeconomic forecast data, management have judged that there is currently a more heightened risk of an adverse economic environment for our customers and the value of our motor finance security.

To factor in such uncertainties, management has included an overlay for certain groups of assets to reflect this macroeconomic outlook, based on estimated unemployment, inflation and used vehicle price levels in future periods.

• The accounting notes disclosed new text (requested by the FRC) about vehicle prices that SUS acknowledged unfavourably influenced the £96m provision calculation: 

“Used vehicle price overlay and sensitivity for our motor finance business

Our used vehicle price overlay is based on used vehicle guide price information and the mileage and condition of each vehicle is estimated which is uncertain. It is also based on an uncertain assumption at 31.1.23 that used car prices which increased significantly in 2021 and 2022 will fall by 13.5%. This used vehicle price overlay has increased loan loss provisions at 31.1.23 by £6,656,000 (2022: increased provisions by £4,552,000). If used car prices were only assumed to fall by 8.5% instead, then this would result in a decrease in loan loss provisions of £2,815,718. If used car prices were assumed to fall by 18.5% instead, then this would result in a further increase in loan loss provisions of £2,717,750.”

• SUS projecting used-car prices falling 13.5% for its bad-debt calculation when also reporting used-car prices advancing 3% last year does seem very prudent. 

• The aforementioned £15m Covid-19 ‘over-provision’ also suggests SUS’s bad-debt numbers are calculated very conservatively.

• The accounting notes disclosed loans in Stage 3 were made on vehicles with a “trade value” of £65m:

“Motor finance – except for loans valued at £4.658m (2022: £4.103m), where we are aware the security is no longer present, security is held on a used vehicle for each hire purchase motor finance agreement. As stated in note 1.1.13 above, valuing these used vehicles secured under our hire purchase agreements is uncertain as the condition and mileage of the used vehicle are unknown. We estimate the trade value of collateral held at 31.1.23 for motor finance loans currently in stage 3 was £64.5m (2022: £59.0m) – these estimated values are stated before taking into account recovery and disposal costs.” 

• Net receivable Stage-3 loans were less than that £65m at £47m…

• …suggesting SUS could (if need be) repossess the Stage-3 vehicles (for £65m) and easily recoup the their Stage-3 loan-book value (of £47m).  

• Unemployment and inflation expectations also influence the IFRS9 write-off sums, which will become more relevant if the economy deteriorates:

“An increase by 0.5% in the weighted average unemployment rate would result in an increase in loan loss provisions by £1,044,494. A decrease by 0.5% would result in a decrease in loan loss provisions by £1,044,494. An increase by 0.5% in the weighted average inflation rate would result in an increase in loan loss provisions by £474,770. A decrease by 0.5% would result in a decrease in loan loss provisions by £474,770.” 

Aspen Bridging

• Established at the start of FY 2018, Aspen offers property bridging loans for small/individual property developers with awkward financial circumstances. 

• The 2023 annual report outlined the lender’s attractions to customers: 

““Mainstream” banks, including the newer “challengers”, continue to lack the speed, flexibility and appetite to furnish the smaller, short-term loans in which Aspen specialises. Recent consolidation and instability in the challenger banking sector is evidence of this and again shows that, technology, speed and a quality bespoke service – as well as price – are what give smaller entrants like Aspen their competitive edge.”.“

• Aspen’s rate card says developers borrowing against residential properties pay a flat monthly interest rate of 0.95% on a 75% loan-to-value arrangement.

• Terms have tightened notably during the last year or so. My H1 2023 review highlighted 0.84% on a 75% loan-to-value arrangement, while my FY 2022 review highlighted 0.69% on a 70% loan-to-value arrangement. 

• These case studies give a flavour of the transactions involved:

• SUS described Aspen’s progress as “sparkling“:

“Aspen’s sparkling set of results benefitted from Aspen’s deliberate move towards larger, higher quality loans with experienced borrowers.“

• 148 clients were advanced an average £905k for 11 months during this FY: 

• The preceding H1 witnessed 73 loans advanced at an average £873k, indicating H2 witnessed 75 loans advanced at an average £936k.

• The £905k average represented a notable 46% increase on the £618k (excluding CBILS) average for FY 2022.

• SUS said the greater loan size reflected a repositioning that ought to “insulate the business against wider market fluctuations“:

“Aspen has repositioned towards higher quality, less mortgage-dependent borrowers and towards higher value properties. This is expected to insulate the business against wider market fluctuations. Over the past year Aspen has prudently increased its interest rates, tightened further already conservative valuations and reduced LTVs. In mid-year the average gross LTV for new business was 74%; it is now 66%.“

• 148 clients receiving an average £905k loan gave a total £134m advance, of which £70m was lent during H2:

• Aspen’s bad-debt provisions remain tiny. 

• Aspen’s loan book before bad-debt provisions advanced by £51m to £116m during this FY, while the bad-debt provision increased from £0.6m to £1.6m:

• Of the 517 loans advanced since Aspen’s formation, 376 have been repaid and only 12 of the remaining 141 are in default — but all 12 were “due to settle in Q1“. 

• SUS said Aspen’s bad debts were limited due to physically inspecting properties and seeking more reliable borrowers:

“Each loan underwritten in Aspen involves secondary independent assessment and a rigorous valuation exercise including a physical inspection of the property by Aspen staff – something which is rare in the industry.“

“Aspen values its security properties very conservatively and keeps gross LTV’s to an average 70% and the business now only considers experienced borrowers from the top three quality bands.”

• Whether employees inspecting every property will eventually hamper Aspen’s growth rate and lending scale remains to be seen.

• Although simply lending greater amounts to borrowers is one way to overcome that employee-scaling issue.

• Profit during this FY came in at £4.5m, of which £2.4m was scored during H2. Note the comparable £3.4m for FY 2022 was assisted by extra CBILS lending of £43m:

• Aspen’s loan book currently represents 24% of SUS’s entire lending (after provisions):

• SUS suggested Aspen’s future was bright:

“Aspen continues on its journey towards being a significant contributor to the future of the Group.” 

• Aspen’s early years have been more profitable than Advantage’s early years.

• Advantage took more than a decade to grow from start-up (FY 2000) to report a £4m-plus pre-tax profit (FY 2011); Aspen in contrast surpassed £4m after six years.

• That said, Advantage required capital of less than £40m to reach that £4m profit, versus more than £100m for Aspen.

• I note two younger members of the controlling Coombs family have become involved with SUS through Aspen rather than Advantage:
  • Jack Coombs is a main SUS board director and an Aspen director.
  • Richard Coombs — a fourth generation Coombs family member — joined Aspen earlier this year.

• SUS’s lead executives — Anthony and Graham Coombs — are third-generation Coombs family members and are presently both 70 years old. I surmise their cousin Jack Coombs, 36, may well become the lead SUS/Coombs executive in years to come.

• SUS was founded by Clifford Coombs during 1938 and the Coombs family owns at least 42% (£111m) of the company.

Financials: Cash flow and debt

• This FY witnessed Advantage report a £32m cash outflow: 

• Advantage absorbed that £32m after lending £187m, collecting £216m, expensing £46m and paying £15m as dividends to the parent company. 

• That £32m outflow was Advantage’s largest since FY 2018 (£42m):

• Advantage generated surplus cash (after dividends) of £46m during FYs 2021 and 2022, of which £39m was effectively used to support Aspen’s growth.

• The extra £79m required during this FY to fund operations/dividends at Advantage (£32m) and Aspen (£47m) was covered by additional borrowings.

• Debt increased by £79m to £192m and remains under control; borrowings are more than twice covered by the £421m lent to customers (after provisions):

• The presentation revealed Aspen distributing a maiden £1.2m dividend to the parent company, of which £0.8m was paid during H1:

• Aspen paying a dividend suggests the division has achieved a ‘base’ level of profitability.

• Bank interest paid during this FY was £7.4m, implying SUS’s average £155m borrowings incurred interest at approximately 4.8%. 

• H2 interest was £4.7m, implying SUS’s average £176m H2 borrowings incurred interest at approximately 5.4%. 

• 5.4% compares to 3.4% interest incurred during the comparable FY 2022. 

• The accounting notes said the effective interest rate on the borrowings was 6%:

“The average effective interest rate on financial assets of the Group at 31 January 2023 was estimated to be 25% (2022: 25%). The average effective interest rate of financial liabilities of the Group at 31 January 2023 was estimated to be 6% (2022: 4%).“

• SUS does not disclose the exact rates payable on its debt facilities, which is poor form:

• In contrast, fellow portfolio member Mountview Estates for example gives the following information:

1. The Group has a short-term borrowing facility of £10 million (2022: £10 million) with Barclays Bank. This is due for review in November 2023 and the rate of interest payable is:

• 1.6% over base rate on overdraft
• Headroom of this facility at 31 March 2023 amounted to £9.94 million (2022: £10 million).

2. The Group has a £60 million (2022: £60 million) long-term revolving loan facility with Barclays Bank with a termination date of March 2027. The rate of interest is 1.9% above SONIA. The loan is secured by a cross guarantee between Mountview Estates P.L.C. and its subsidiaries. The loan is not repayable by instalments. Headroom under this facility at 31 March 2023 amounted to £20 million (2022: £58 million).

3. The Group has re-negotiated a £20 million long-term revolving loan facility with HSBC Bank. The termination date for this facility is March 2028. The rate of interest payable on the loan is 2.1% above SONIA. The loan includes a Negative Pledge. The loan is not repayable by instalments. As at 31 March 2023 headroom under this facility amounted to £3.3 million (2022: £2.8 million).

• Management’s FY webinar disclosed debt costs were “just less than 3%” above SONIA, and therefore shareholders “could assume” S&U was at the time paying “about 7% on the borrowings“.

• SONIA is currently 5.18%, which means SUS could now be paying 8% on its debt. 

• 8% on gross debt of £196m equates to annual bank interest of £16m — more than double this FY’s £7m.  

• Management’s FY webinar also confirmed 100% of debt was variable-rate.

• SUS said higher interest rates were budgeted for:

“A rapidly increased Bank Rate has been budgeted for, not only in our usual budgets but in our longer-term projections. Current signs hint that such a view might happily prove conservative.”

• The base rate was 4.25% when this FY was published and is now 5.25%. 

• Management’s FY webinar said the debt was within SUS’s “comfort zone” and SUS claimed its borrowing facilities of £210m could even be “augmented further“:

“Gearing increased from 55% to 86% which is still low for a financial services group. S&U net group borrowings are £192m within S&U’s medium-term facilities in place of £210m with its excellent, loyal and constructive banking partners. These were augmented by £30m in Autumn 2022. It is anticipated that as growth trends become clearer, in what is still a very uncertain macro-economic climate, then these facilities will be further augmented.“

• Higher interest rates will diminish the returns earned on the money SUS has already lent, particularly at Advantage, where loan terms last for 54 months (see Valuation). 

• Interest payable by all customers (Advantage and Aspen) is fixed throughout their agreements.

Financials: Returns on capital employed, loan capital and equity

• SUS’s return-on-capital-employed slide made a welcome comeback following a three-year absence:

• ROCE at 15% for Advantage is similar to pre-pandemic levels.

• Advantage ought to enjoy lucrative ROCEs when customers repay their loans in full and on time.

• Charging a flat 16.3% annual interest on a £7.8k loan over 54 months less cost of sales of £907 generates approximately £4.8k.

• Earning £4.8k from a £7.8k investment over 54 months equates to a 62% return or close to 14% a year. 

• Note that Advantage customers repay a mix of loan capital and interest during the terms of their loans.

• That c14% return could therefore be approximately 27% assuming the loan capital is repaid equally throughout the term.

• The same calculations for the ten years to FY 2022 are within a consistent — and appealing — 27% to 31% range. 

• Of course not every Advantage loan is repaid in full and on time. 

• 24% of the £403m Advantage lent originally (and still outstanding) has been classified as a bad debt (see Advantage Finance: Provisions)

• Reducing that 27% return by 24% gives a 21% return, which remains very healthy and still leaves good room for error with a greater proportion of non- or part-paying borrowers.

• Companies House shows Advantage’s net asset value advancing from £76m to £147m during the last five years…

•  …with cumulative dividends paid to the parent company of £61m during the same time:

• Advantage creating an additional £132m (i.e. £71m extra NAV and dividends of £61m) over five years from a starting equity base of £76m is extremely impressive, especially as the subsidiary’s expansion during those five years was funded entirely by repayment collections reinvested into fresh customer loans. 

• Group NAV meanwhile has gained £73m to £225m during the last five years, with dividends paid to shareholders over the same time amounting to £68m:

• The group creating an additional £141m over five years from a starting equity base of £153m is very respectable, and equivalent to a compound 14% total return. 

• The difference between the extremely impressive returns generated by Advantage and the very respectable returns generated by the group are the very modest returns from Aspen.

• Companies House shows the property subsidiary absorbing total cash of £106m since its formation and generating cumulative earnings of only £8m.

Financials: Employees and margin

• This FY included commentary critical of general UK worker productivity:

“As has been evident over the past 12 years, productivity is feeble in the UK and is unlikely to increase substantially since the current government lacks a clear and robust growth strategy.
…
“Last year a further £74bn was “invested” in the ever-growing public sector where productivity is both significantly less than in the private sector, and may even in some areas be negative. Public sector output is still 7.4% below pre-pandemic levels. This is a significant cause of Britain’s decades-long decline in productivity.”

• Advantage’s employee productivity has not shown obvious improvements during recent years.

• Each Advantage employee continues to handle motor loans (before provisions) of approximately £2m and generate revenue of approximately £470k:

• Aspen employees meanwhile each handle property loans (before provisions) of approximately £4m and generate revenue beyond £600k:

• SUS managed to keep administrative costs (mostly employee expenses) at 16% of revenue for this FY:

• Overlook the comparable FY 2022 and its provision reversals, and this FY’s 48% operating margin was the group’s best since at least FY 2015.

Valuation

• This FY sounded upbeat about FY 2024:

“Current trading is good and I am confident that our focus, our expertise and our experienced team will enable us to take advantage of the emerging opportunities that this year will bring.”

• The Q1 update during May was also positive:

“S&U is pleased to report another strong trading performance in the first quarter of this financial year. Group profit, turnover, debt quality and collections are ahead of last year. In addition, S&U continues to strengthen its financial, regulatory and branding foundations which will enable it to grasp significant opportunities for growth, anticipated at its full year results in March.“

• But an H1 2024 update during August was not as positive and cited “economic headwinds“:

“The group continues to trade well. It does so carefully due to the current economic headwinds impacting consumer confidence, disposable incomes, taxation and interest rates. Although the past two months have seen an uptick in transactions and the new customer pipeline, current economic policies in the UK reduce consumer confidence and create barriers to our usual rate of sustainable growth.“

• The August update admitted Advantage advanced 11% less during H1 2024 than H1 2023, and rising interest rates had impacted the subsidiary’s margins. However, the level of up-to-date motor loans was ahead of the group’s expectations.

• Transactions at Aspen meanwhile were “below budget” during H1 2024, although “good repayment quality” had led to below-budget impairment charges.

• The August update confirmed H1 2024 had ended with a loan book of £417m (down £4m on this FY) and debt of £184m (down £12m on this FY). 

• NAV may therefore be £417m less £184m = £233m or £19.18 per share.

• The £22 shares presently trade at 1.15 times my NAV guess of £19.18 per share:

• The very best buying opportunities have occurred when these shares trade at NAV or below, while upside has tended to be very limited when the shares trade at 2x NAV or more.

• Buying at NAV should (in theory) deliver returns equivalent to lending direct to SUS’s customers — with NAV effectively protected by the right to repossess the secured vehicles/properties if the loans default.

• My 1.15x NAV rating therefore implies the market is worried that economic trouble will lead to poor trading, greater write offs and slower NAV progress.

• My 1.15x NAV rating suggests the market is also worried that greater borrowing costs (and higher tax) will hamper NAV progress.

• For perspective, this FY’s pre-tax profit of £41m would have reduced by £5m to £36m were borrowing costs incurred at the aforementioned 8% (and not at the actual c4.8%) on the average £155m debt (see Financials: Cash flow and debt).

• Then apply standard UK tax at the new 25% (rather than 19%) to that £36m, and this FY’s earnings would have dropped from the original £34m to £27m — a £6m or 19% reduction.

• That £6m reduction equates to 53p per share — more than a third of the actual £1.49 NAV per share growth enjoyed during this FY.

• The 1.15x NAV rating may also reflect the substantial capital employed — that delivers much lower returns — at Aspen.

• Slower NAV growth during the next few years could leave shareholder returns more dependent on the dividend.

• The trailing 133p per share payout provides a handy 6.0% yield at £22.

• This share has typically offered a useful income. My initial purchase during Q1 2017 at £21 supplied a trailing 4.1% yield, while a top-up during Q2 2019 at £19 supplied a trailing 6.2% yield and a further top-up during Q4 2020 at £17 supplied an (at the time) estimated 5.3% yield.

• The aforementioned Coombs family managers have successfully navigated many previous downturns (not least the pandemic), and the 2023 annual report reminded shareholders of the long-term benefit of employing such leadership:

“Our over-arching factor in the success of our business over 80 years and through three family generations of management is our business philosophy. The identity of interest between management and shareholders has fused our ambition for growth with a conservative approach to both credit quality and funding.”

• The board’s “conservative approach to both credit quality and funding” should (once again) prove its worth were yet another bout of difficult times to emerge. 

Maynard Paton