Orchard Funding – an impressive set of profit numbers

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In the last newsletter I drew attention to Orchard Funding’s (LSE:ORCH) net current asset value, NCAV, per share, at 72p, being appreciably more than its share price of 56.8p. This was a good starting point for including it in my net current value portfolio. Other factors, mostly on the qualitative side, also came into play – to be discussed in future newsletters.

First I’ll show how Orchard might have fitted into my Modified cyclically adjusted price earnings ratio portfolio as well as the NCAV portfolio.  As you can see in the table below for the last seven and a half years Orchard has produced impressive earnings per share numbers for a share valued by Mr Market at 56.8p (market capitalisation £12.1m). The average is 6.5p (if I include an annualised EPS for 2021).

Thus the cyclically adjusted price earning ratio is 56.8p/6.5p = 8.7, about one-half of that for the UK market.

My, admittedly thin, reasoning for allocating to the NCAV portfolio is merely that I only have seven and half years of data for earnings rather than the more conventional ten used for a CAPE ratio calculation.  It really doesn’t matter which portfolio it goes into; simply that it is deep value investment likely to provide a good return. Having the reinforcement of fulfilling not just one but two strict criterion is comforting.

It’s also comforting to see such a high proportion of earnings flowing to shareholders in the form of dividends. The business is cash generative, growing steadily (until Covid-19) at a rate which doesn’t absorb a high proportion of the money it makes.

The directors, including the 53.3% holder, prefer to reward shareholders regularly – his dividends amount to more than a third of a million each year – rather than splurge on rapid expansion and speculative ventures.

Year end: 31st July, £m   2012   2013   2014   2015   2016
Lending volume 44 49
Loan book at year end 19 18 22
Revenue (interest income) 2.7 2.9 3.0 3.4 3.5
Net interest income (i.e., after paying interest on funding) 1.8 1.9 2.1 2.5 3.2
Profit before tax 0.7 0.7 1.0 1.3 1.3
Profit after tax 0.5 0.6 0.8 1.0 1.0
Earnings per share 6.87p 8.77p 4.7p
Dividends per share 1.17p 2.81p
Year end: 31st July, £m   2017   2018   2019   2020   H12021 x 2
Lending volume 63 69 73 66 60
Loan book at year end 28 31 32 30 28
Revenue (interest income) 4.6 5.2 5.5 5.3 4.6
Net interest income (i.e., after paying interest on funding, plus bank charges for 2020/21) 4.2 4.6 4.9 3.9 3.3
Profit before tax 1.6 1.9 2.0 1.6 1.2
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