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S & U Plc: THE INVESTMENT CASE

S & U has driven higher over the past month as lender’s motor finance arm goes from strength to strength

In a trading statement delivered to the group’s annual general meeting on May 18, S&U said its fiscal first quarter saw a record number of loan applications, with new transactions up by a fifth year-on-year
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INVESTMENT OVERVIEW: SUS The Big Picture
In an interview at the time of the AGM, S&U chairman Anthony Coombs said that the niche lender’s ”business is very good”

S & U Plc (LON:SUS) shares have driven higher over the past month after a slow start as the niche lender’s motor finance arm continues to go from strength to strength, with the company venturing into other markets.

The sale of its home credit division, Loansathome4u to NSF in July 2015 generated around £80mln net of fees and tax for S&U, with the monies raised invested into accelerating the  growth of its motor business -  Advantage Finance – and moving into bridging finance.

That switch of focus looks to have been a sound decision.

WATCH: 'Business is very good' - S & U chairman Anthony Coombs

In a trading statement delivered to the group’s annual general meeting on May 18, S&U said its fiscal first quarter saw a record number of loan applications, with new transactions up by a fifth year-on-year, while average loan quality was even better than it was a year ago.

The group said customer numbers were at a record level and surpassed 46,000; to put that into perspective, at the end of September 2016 the company was celebrating customer numbers passing the 40,000 mark.

Business very good

In an interview with Proactive Investors at the time of the AGM, S&U chairman Anthony Coombs said that the niche lender’s ”business is very good.”

About the only fly in the ointment looked to be a slight increase in the rolling 12 months impairment-to-revenue measurement to 21.0% from 20.1% at the end of January, reflecting changes in the product mix at Advantage.

Nevertheless, Advantage’s overall debt quality remained good, with collections exceeding £9mln a month.

 Advantage obtained a full licence authorisation from the Financial Conduct Authority earlier this year.

S&U’s full-year result at the end of March had showed Advantage achieve a record of more than 20,000 new agreements, an increase of 32% on the previous year.

That helped drive a 29% year-on-year increase in pretax profit from continuing operations to £25.2mln, up from  £19.5mln a year earlier, as revenues rose 34% to £60.5mln, up from £45.2mln.

Looking forward analysts are forecasting S&U to deliver compound earnings growth of 20% over the next few years, with a dividend yield of around 5% another attraction for shareholders.

S&U paid a full-year dividend of 91p, up from 76p the year before, with the final dividend hiked by 18.2% to 39p, up from 33p.

Bridging the motor focus

Away from the motor business, S&U’s Aspen bridging finance operation opened for business in the last quarter, having received all the necessary regulatory approvals earlier this year.

Aspen will provide bridging finance for individuals and business owners, secured on residential and commercial property.

Coombs said with S&U’s full-year results that its infrastructure and service capabilities provide a good foundation, so the group is therefore exploring its ability to benefit from a bridging market where aggregated loan balances are estimated to reach £8.8bn a year in the UK by 2020.

WATCH S & U 'continuing to go from strength to strength'

The S&U chairman added: “Both Advantage and Aspen operate in growing markets. These in turn exist within a robust British economy, where the labour market is strong and where the current focus on increasing productivity and reducing regulation should underpin economic growth.”

After a weak start to the year, S&U’s shares have picked in the past few months, taking on over 1.5% to 2,020p, although the shares are still down around 5% in the year-to-date.

Bank of England has voiced concerns around the rapid growth in consumer finance

Analysts at broker Shore Capital pointed out in May that S&U’s relative weakness has come as the market has grown “more concerned about the motor finance space following high profile comments by the Bank of England around the rapid growth in consumer finance, including motor.”

They said: “While these concerns are valid, we believe that it is the prime lending space where the risks are greatest”.

The analysts noted: “S&U operates in the sub-prime space, where loans are typically hire purchase in nature (full balance paid off over life of the loan) and are typically held against second hand cars (which customers’ purchasing requirements may be less discretionary).”

Shore Capital pointed out that group borrowings had increased to £65mln, up from £49mln at the end of January, reflecting growth in the loan book and payment of the final dividend, although that remained well within the group’s increased committed funding lines of £95mln.

Peel Hunt was appointed as the firm’s corporate broker in May.

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Article
March 28 2017

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