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I recommended shares in this company first back in my days at t1ps.com. Including dividends we more than doubled our cash there. I recommended this stock again as a yield play six weeks ago on my new Nifty Fifty website at an offer price of 839.5p. Since then the company has duly served up a robust trading statement on December 6th which gave me no cause to alter my forecasts and the shares are now 927.5p in the middle. But they are still cheap. My target share price is at least £11.50.
I shall be serving up a hot new recovery tip on the Nifty Fifty later today as well as a new idea on the short tack in my weekly Short Letter. To access that tip and the short idea and for more details of the website click HERE
Investment Case: Fully-listed S&U plc (LSE:SUS) is a tip from my old days at t1ps.com which has rewarded well (well over 100% ahead including dividends) – but from which there looks much more to come. The company provides home credit and motor finance throughout England, Wales and Scotland and has shown itself not only resilient to the current economic environment but able to continue to grow through it. Given this profile, I argue a forward yield of 4% is more than sufficient here – which suggests an initial target price of £11.50 a share.
Operations: The company derives its income from the provision of home credit and motor finance. The former provides small loans on a door-to-door basis for folk on council estates. The sums are small and the interest payable is steep but not usurious. There is a relationship between collectors and repeat customers and bad debts tend to be low. The motor finance model is similar – S&U’s customers are not buying Porsches.
Management Incentive: This is a conservatively run company with the Coombs family owning more than half the shares and Anthony Coombs (a former Tory MP who is far too right wing to be in Call Me Dave’s dismal party – all credit to AC) now at the helm. Thus the incentive to continue with a progressive dividend policy is strong.
Financials: Results for the company’s half year ended 31st July 2012 showed a 13.7% increase in pre-tax profit over the comparative prior year period, to £7.32 million, on the back of revenue 8.2% higher at £26.79 million. Earnings per share increased by 18.2% to 47.12p and the interim dividend was increased by more than 9% to 12p per share. The profit performance meant that despite £3.53 million paid out in dividends and a £2.51 million increase in amounts receivable from customers (mainly due to planned extra investment in the receivables of the growing motor finance business and against just a £374,000 increase in trade & other payables), net debt was still nudged £112,000 lower during the period, to end at £19.13 million. Net (tangible) assets increased by £2.14 million to £57.01 million.
The growth was mainly driven by the motor finance business – which delivered a 28.9% increase in pre-tax profit (to £3.76 million) on revenue growth of 14.2% (to £9.96 million). The home credit business nudged its pre-tax profit up to £3.56 million (from £3.52 million) on revenue 4.9% higher at £16.83 million. The former reported customer numbers an eighth higher than the prior year, with both margins and debt quality rising – including a record 88% of live receivables up to date as at the period end (from 84% a year earlier). The home credit business had slightly higher debt provisioning than the very low levels in the first half of the prior year and together with operating in a market where customer appetite and responsible lending have restricted receivables growth, its performance was solid. For the group as a whole, collections were up 8%, receivables up 6% and impairment charges reduced by 1%.
Risks: The company is comfortably operating within its banking facilities and is a proven prodigious generator of cash, but both of these clearly rely on repayments by customers. The company has credit control policies supported by ongoing reviews for impairment – and a strong track record reassures in this regard. There is also a risk in legislative and regulatory change within the consumer credit sector. However, the recent report on ‘high cost credit providers’ bashed not long-established, reputable businesses such as this but the new breed of ‘pay day loan’ providers. This may therefore have a marginally positive impact on S&U.
Valuation: Forecasts – which the 6th December trading statement underpins – are for a full-year pre-tax profit of £13.5 million, generating earnings per share of more than 86p (up from 76.11p last year). Next year £14.5 million and approaching 91.5p in earnings per share are anticipated. The dividend is expected to rise from 41p per share last year, to 44p this and 46p next year. For a company which should be resilient to the current environment (“in uncertain times, both our home credit and motor finance businesses give our customers the reliable, responsible, convenient and flexible finance they require”) and has shown itself able to continue to grow despite a sombre economic back drop, I would argue a yield of 4% more than sufficient – suggesting an initial target price of £11.50 per share. On an earnings basis, this equates to a price-earnings multiple of little more than 12.5 times – which is hardly demanding given the company’s resilient, growth profile.
Thus at a current offer price of 927.5p (2013 yield of 4.96%), the shares are an income portfolio buy
To catch Tom Winnifrith’s next hot share tip ( a recovery play) on the Nifty Fifty click HERE
Tom Winnifrith is one of they Keynote speakers at ADVFN’s UKInvestor Show on April 13th. Also appearing are Britain’s Buffett Nigel Wray, property guru and secret millionaire Nick Leslau, gold guru Dominic Frisby, bear raiders Evil Knievil and Lucien Miers, top chartists Alpesh Patel, Zak Mir and John Piper, ADVFN boss and master investor Clem Chambers, mining guru Amanda Van Dyke, Christopher Booker plus the CEOs of companies such as Northern Petroleum, Stanley Gibbons, Leyshon Resources and many more. For more details or to book your free ticket go here.
