Orchard Funding – bought for my net current asset value portfolio

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I’ve bought shares in Orchard Funding (LSE:ORCH) at 56.8p because its net current asset value is 72.1p and it is financially and operational stable with a loyal customer base and low-risk business model as well as a highly experienced and capable managerial team. It also produces a reliable 3p dividend each year supplying an attractive 5.2% dividend yield.

Given the quality of the customer offering and the potential to tap into adjacent markets it is likely that the dividend will grow nicely from here.

Since the company floated on the AIM market in 2015 annual earnings per share have averaged 6p putting the shares on a cyclically adjusted price earnings ratio of less than 10, two-thirds the market average.

Even in the year ending 31st July 2020, one affected by Covid, earnings per share came out at 5.96p. In the most recent half year, 1st August 2020 to 31st January 2021, a period of significantly reduced client activity, Orchard Funding generated 2.19p earnings per share (2019: 3.75p).

The resilience displayed in the Covid slump was the second time the business model was tested by events beyond the firm’s control having sailed through the Global Financial Crisis in good shape.

The business

The company in its modern form was built by former investment banker Ravi Takhar following his acquisition of 100% of the equity in 2002. He now owns 53.66% after the sale of £10m of new shares to other investors when it joined the AIM market in 2015.

The business model is simple: around the country are thousands of insurance brokers whose clients often do not want to pay say a £20,000 annual insurance premium all in one go at the start of the policy.

Orchard Funding, through its Bexhill subsidiary, offers brokers and their clients a deal.  It will pay the premium and, in return the client will make say 10 monthly payments to Bexhill.  The amount paid each month is slightly more than one-tenth of the premium to allow for an effective interest charge.

Typically, Orchard will fund one half of its outstanding loans to customers with its own money and one half will come from an annually arranged loan facility from Barclays Bank or a couple of other banks it has relationships with.

Even paying around 4.5% on the funding it borrows (which includes bank fees etc.) Orchard can make a good profit because it charges APRs much higher than that (high teens).

The insurance broker is happy because the ultimate customer is provided with an additional service and because it receives commission from Orchard/Bexhill.

The broker will use Orchard’s in-house developed software. This can be set up to allow the broker to either operate their own funding company to provide a high level of personal service to clients. Alternatively, the broker can act as an introducer to Orchard which then takes on the direct lending to the customer.

Orchard insists on recourse to the broker………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

 

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