Edison Note - attractive yield for patient shareholders29 Sep 2022 15:10
Positive H123 results
S&U's total net receivables were £370m at the end of July, up 21% from H122. Within this growth, Advantage motor finance receivables increased by 13% to £280m and Aspen property bridging loans by 56% to £90m. H123 revenue was £49.4m (+15%) and pre-tax profit increased by 5% to £20.9m; the smaller increase in profit reflected a lower-than-normal level of impairment charge at Advantage last year following previous exceptionally high pandemic-period charges. The group reported that credit quality remained strong and improving in terms of bad debt, default level and collections against due. Earnings per share increased by 6% to 140.7p and a first interim dividend of 35p (33p) was announced.
Outlook presents challenges and opportunities
While S&U indicates that both businesses continue to perform well, it acknowledges the more challenging economic background with growing pressure on household incomes and the potential for a cooling in the housing market as rates rise. Advantage has adjusted its affordability criteria to reflect conditions, refined credit metrics and broadened its range of introducers, supporting its ability to address opportunities in the market that offer attractive risk-adjusted yields. Aspen is monitoring valuations and the availability of refinancing closely, but its high-net-worth borrowers are showing resilience and it stands to benefit if some participants withdraw from the market or act more cautiously.
Valuation
Our estimates for FY23 and FY24 are only changed modestly: increases in EPS of 1.9% and 3.5% respectively, with the latter reflecting a lower assumed tax rate. The shares have shown weakness (along with peers) as the macroeconomic outlook has become more difficult and trade at a price to book ratio of 1.1x compared with the 10-year average of 1.8x. An ROE/COE model suggests the share price discounts a sustainable return on equity (ROE) of 11.3%, compared with the historical five-year average of 15.8%. The 6.7% prospective yield is an additional attraction for patient shareholders.