Tipped by ST in Investors Chronicle15 Oct 2020 14:25
Middlesbrough-based Ramsdens (RFX: 127p), a diversified financial services group whose main activities encompass foreign-currency exchange, retail jewellery, pawnbroking and a precious metals buying and selling service, has issued a pre-close trading update that has beaten analysts forecast by a country mile.
In the 12 months to 31 March 2020, Ramsdens reported a 30 per cent increase in pre-tax profits to a record £8.5m on revenue of £59.5m, a result that drove up earnings per share (EPS) from 16.7p to 21.4p (‘Shopping for a bargain buy’, 28 May 2019). The UK lockdown came into force in the last week of March, so had little impact on that trading period. Ramsdens then closed all its 159 stores on 24 March, and furloughed 700 staff until 28 May. It wasn’t until mid-July before they were all open again for business following a phased re-opening.
As a result, analyst Jamie Donald at Liberum Capital had predicted a pre-tax loss of £3.5m on revenue of £11m in the six months to 30 September 2020. In the event, Ramsdens has reported a pre-tax profit of £500,000. Having previously changed its financial year end to 30 September 2020, this means that Ramsdens will now report a pre-tax profit of £9m and earnings per share (EPS) of 22.8p for the 18-month period, or 80 per cent higher than analysts had previously forecast. The key drivers for the outperformance are a recovery in retail jewellery sales, and the strength of the gold price on precious metal buying and selling activities, a segment accounting for a fifth of gross profit.
It’s worth noting, too, that Ramsdens’ clients have been repaying their loans, so much so that the company now has net cash of £16m (53p a share). It also has a £10m undrawn revolving credit facility. True, foreign currency commission is 30 per cent of levels a year ago, but there is a silver lining as Ramsdens is taking market share from distressed high street foreign currency exchange operators and earning higher spreads, too.
Ramsden’s strong balance sheet means that it’s well placed to acquire loan books from distressed rivals. Indeed, it purchased two small books (£250,000) at the period end. Also, with the gold price riding a wave, expect an uptick in the pawnbroking business (accounting for a quarter of gross profit) as loan books rebuild by providing short-term relief to cash-strapped, but asset-rich customers pledging their gold and jewellery.
Liberum are forecasting pre-tax profit of £3.9m and EPS of 9.8p for the 12 months to 30 September 2021, but these estimates look very conservative. However, even on this basis, the shares are only rated on a cash-adjusted forward price/earnings (PE) ratio of 7 and offer a prospective dividend yield of 4 per cent based on a 2021 pay-out of 4.9p a share. A price-to-book value of 1.1 times is attractive, too.
So, although the Covid-19 disruption to business this year has sent the share price well below the 165p entry point in my market-beating 2019 Bargain Share port
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