Berenberg upgrades S&U to 'buy' from 'hold' after Q1 update

(Sharecast News) - Berenberg upgraded S&U on Friday to 'buy' from 'hold' and lifted the price target to 2,310p from 2,220p as the bank becomes increasingly positive about the medium-term outlook following the company's first-quarter update this week.

"We make no changes to our estimates in this note but reframe our investment case following a change of analyst," Berenberg said.

Berenberg said that according to its Q1 update, S&U is edging closer to agreeing a new funding facility, which it thinks could increase its existing available debt of around £330m by an additional £300m over the next three years.

"We expect that this additional funding should support net receivables growth of 20% CAGR from FY26 to FY29E from £497m to £857m," it said. Berenberg estimated that this growth and funding mix could drive an improvement in return on tangible equity from 9.5% in FY26 to 12.4% in FY29E, and earnings per share growth of 16% CAGR from 195p in FY26 to 306p in FY29E.

"We see the company delivering these expectations while improving its dividend payment further, resulting in a yield of circa 7.5% in FY29E," it said.

The bank said S&U should be able to use its increased funding to take advantage of a large and growing market in both of its divisions, Advantage Finance and Aspen Bridging.

"We believe that Advantage's end-markets are buoyed by a more stable regulatory environment than that of the previous two years, while we think demand for motor finance should remain sticky through-cycle," it said. "In Aspen, we see decreasing affordability of homes, together with more onerous government regulation in the buy-to-let market as key demand drivers."

Berenberg values S&U on a price-to-tangible book value per share multiple of 1.0x, resulting in a price target of 2,310p.

"As returns improve, we believe a multiple of 1.0x is appropriate," it said, noting the company's attractive dividend policy, and the sector discount that currently weighs on the specialist lender segment of the market.

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