The Financial Grimes: 2 July 2019

This top City analyst reviews the financial sector stocks making headlines today.

Jeremy Grime spent 15 years as a financial sector analyst, working at Altium Capital, RBC Capital Markets, Panmure Gordon and most recently as Director of Research at finnCap. Jeremy is also a qualified accountant.

Jeremy's blog is written with more experienced investors in mind. However, we have included a brief glossary at the bottom of the page to help those less familiar with some of the language used. For more on key financial metrics and valuation ratios click here.

H&T – Acquisition 

Share Price: 316p

Mkt Cap: £120 million

Conflict Disclosure : No holding

H&T Group (LSE:HAT) is a pawnbroker

Acquisition - The company is acquiring 65 Money Shop stores and 29 pledge books.  Price is £9 million for the trading stores and £1.6 million for the pledge books.  The acquisition made £2.6 million last year so this represents a multiple of c 4.6X. The acquisition will be funded by a £6 million equity placing and the balance (£8.6 million – which includes the need for a further £4 million working capital) will be funded by bank facilities. The acquisition is expected to be earnings enhancing in its first full year.

Estimates - H&T has around 186 stores which are expected to make £14.5 million PBT this year, which is £78k/store. If no profitability uplift is achieved the pro forma PBT would be £17.1 million and, with 5% extra shares in issue, the earnings accretion would be c 10%. However, the new store profits are only £40k/store. If this can be lifted to the profitability that H&T achieves it could be 20% earnings enhancing.

Valuation - The PER is 10.1 and yield 3.5% before earnings enhancement from the acquisition. Price/Book 1.1, while the ROE pre acquisition is 10.5%.

Conclusion - This is a very cheap acquisition. I suspect there may be 10% on the share price for this deal, but the shares are unlikely to become expensive.  The real reason to own this stock is in the belief that the gold price is going up – which it seems to be. This acquisition could turn out to be well timed. Nice to see the placing completed at a 0% discount.

Plus 500 – H1 Trading Update 

Share Price: 539p

Mkt Cap: £611 million

Conflict disclosure: No Holding

Plus500 (LSE:PLUS) runs an online trading platform for contracts for difference (CFDs).

Update – Trading is in line with expectations.  After a quiet Q1, revenue in Q2 increased from $53.9 million to $94 million,  giving $148 million for H1. 48% revenue from outside the European Economic Area (EEA), while 23% was from professional clients.

Estimates – FY 19 revenue is expected to be circa $367 million so with 40% delivered in H1 and an upwards trajectory that looks reasonable.  

Valuation Per 5X yield 12%.   

Conclusion - The valuation is hugely persuasive. If the dividend isn't increased for eight years you get your money back.  But with less professional clients than comparators, such as IG, the future remains uncertain. I think they will recover well, but confidence levels in that are low.  

Funding Circle Holdings – H1 Update 

Share Price: 163p

Mkt Cap: £567 million

Conflict disclosure: No holding

Funding Circle Holdings (LSE:FCH) provides loans to small and medium-sized companies. 

Update Loans under management up 37% and new loan origination up 14%. Revenue growth 30% and "segment adjusted EBITDA" breakeven.  Investor returns are expected to be 5%-8.5% in 2019 and revenue growth expectations are being reduced for 2019 from 40% to 20%.

Estimates The company remains loss making within the forecast horizon. 2019 revenue expectations likely to reduce from £200 million to £170 million. The £35 million loss expectation may increase with lower growth, but the company says it expects to improve on last years loss which was £49 million.

Valuation 3.3X turnover. But the company still has significant cash from its IPO. At December 18 it had £330 million, so the EV may be c£250 million valuing the company at 1.5X revenue

Conclusion  The company has found that the age old rule of SME lending holds true, whereby fast growth increases impairments. I suspect this isn't the last downgrade.  Having IPO'd at 440p and now at 163p I can still see the shares halving before they trade close to cash.

For information about Jeremy's 'deep dive' company analysis, you can email him at jeremy@charltonillingworth.co.uk

Jeremy Grime is an independent equity markets analyst and freelance contributor, not a direct employee of interactive investor.