Stockwatch: A gold-plated option for tough times

The gold price and solid financials make this AIM-listed pawnbroker one to watch in tough economic times.

H&T Group

Is the bull case for this AIM-listed pawnbroker H&T Group (LSE:HAT), gold buyer and personal lender, still intact? I've favoured the stock in recent times e.g. at 260p late last year and 290p last March when I concluded its risk/reward profile remained attractive:

"potentially 20% down, underwritten by net tangible asset value, versus 40% up by way of a two-year earnings growth scenario undaunted by Brexit".

Thus a tuck-away for ISAs/SIPPs and AIM-linked inheritance tax relief in particular, given it's a well-proven not speculative business. Latest interims to end-June show pawnbroking and gold scrap contributing 53% of £44.1 million gross profit, which ought to be at least resilient to recession if not benefiting, while personal/payday lending at 26% could also conceivably prosper given 40% of the UK population has no savings and 30% less than their monthly salary.

Mind the long-term history of what used to be called Harvey & Thompson as a listed group, has involved a few bumps and its stock is prone to volatility, however an overall positive stock trend this year likely reflects expectations that like AIM-listed Begbies Traynor Group (LSE:BEG) corporate insolvency services, it's more likely to do well in hard times.

Solid underlying financial criteria to continue

The price reached 355p two days after the 13 August interims, though has seen profit-taking to 340p currently.

Key financial statistics don't exactly scream "value" and the initial take-away from the table – if EPS of 33.5p is a realistic forecast for the current financial year – is earnings growth moderating quite starkly after the 2015-17 fat years, as if jewellery retail sales might be compromised, however they rose 13% to £18.5 million in the first half, a lower margin of 29.2% from 36.6% reflecting aged stock clearance, lower-margin watches sold and more repair/refurbishment work.

Underlying interim EPS growth in the low teens is reflected also in a 2020 year forecast I've seen for 37.7p which compares with a forward PE multiple around 10 reducing to nine times – thus an attractive price/earnings-to-growth (PEG) ratio around 0.85 times.

Free cashflow per share comfortably exceeded earnings per share in 2018 and prior to 2016, and a prospective 3.7% yield is thrice-covered by earnings.

While latest interims do include a "non-recurring" exceptional charge of £0.5 million from advisory fees for the £11 million purchase of 65 high street stores from The Money Shop (a similar pawnbroking/loans operation), the financial track record has no irritating gap between reported and normalised profit/EPS as costs get separated out or capitalised.

The stock does trade at a modest 30% premium to book value or 55% to net tangible assets, although the current takeover of Greene King (LSE:GNK) is only the latest example of buyers undaunted in the low sterling-inspired, foreign takeover boom amid Brexit.

H&T's returns on equity and total capital employed are in an 11% range, fair enough. Altogether a key-statistics view implies a strong hold tending to "buy", e.g. given the stock qualifies for the PEG ratio after 4 years of earnings growth and with prospects to continue, H&T could increasingly feature on value screens.

Mind how cost-cutting appears to have bolstered profits

Interims show a 16% advance in operating profit to £8.7 million or by 9.3% to £8.2 million after that £0.5 million advice fee (note 11 to the accounts) hence a normalised operating margin of 12.4% versus 10.9% on an IFRS basis.

Again it's not flash but still respectable. Of more concern is a mere 2.2% revenue rise to £70 million, i.e. broadly flat in inflation-adjusted terms.

A ratio study of the income statement explains this disparity: cost of sales barely rising at all hence "improving" as a percentage of turnover from 37.8% to 37%, like-for-like. Below gross profit, the ratio of "other direct expenses" combined with administrative expenses – as a percentage of turnover – also "improved" from 51.2% to 50.6%.

It looks like there's been consistent cost-cutting but which in time will need underlying revenue growth also, to sustain a growth stock image.

A cynical view would therefore be: this July's acquisition of 65 high street stores and also 29 pledge books (relating to Money Shop stores to be closed) is rather vital to sustain growth.

Nothing wrong with that in principle though: H&T listed various complementary virtues in the deal, including the potential to add additional services to the acquired stores. Investors signalled approval by way of 1.9 million new stock placed at the market price of 316p rather than any discount, which has since risen.

Overall I think this deal supports the case for holding H&T – or more harshly, props it.

Variability within the group segments

Such a "mixed" profile extends financially across the group's segments, making it quite complex for a £137 million small cap.

Pawnbroking's gross pledge book rose 12.6% to £53.8 million like-for-like, helped by higher-carat gold item lending and quality watches; although minus impairment charges, effective gross profit rose a modest 3.7% to £16.8 million.

If H&T is to be seen as a counter-cyclical stock thriving on recession, pawnbroking's overall result needs to invigorate.  An aspect possibly tempering this hope is people more likely to have jewellery items to pawn, being in an income bracket currently benefiting from wage rises, although the latest performance check has been impairment.

Pawnbroking scrap slumped, if small-scale anyway and which accentuates change: gross profit down 60% to £0.4 million on revenue down 26.3% to £5.9 million – a margin near-halved to 7% said due to delay in diamond sales, which presumably has also impacted revenue.

Retail sales rose 12.8% to £18.5 million albeit with gross profit down 10% to £5.4 million as more lower-margin watches were sold in store and there were also higher costs for watch repair/refurbishment.

Stock reduction of aged items also compromised margin. More positively if from a low base, the online watch retail site "est1897" nearly doubled sales to £2.0 million.

Personal loans were mixed: net revenue up 74.2% to £5.4 million helped by the margin up from 37% to 54% (due to exiting non-viable areas) albeit the loan book down 5.3% to £19.4 million which isn't explained.

Possibly in response to this, marketing has increased e.g. to encourage potential customers from the H&T website to a branch. Less impairment charges however, gross profit soared 73.7% to £5.4 million.

Gold purchasing profits slid 28.6% to £1.5 million on sales 16.8% lower at £8.4 million although gold prices have only taken off from June.

A slightly lower margin of 18% was blamed on timing differences and gold in stock for melt. With gold prices likely to remain strong during a period of heightened financial uncertainty, this segment is especially worth watching.

So it's a very mixed narrative operationally, whereas growth stock buyers might expect a cleaner story. Yet the different strands to H&T's activities do make strategic sense to combine in terms of group objective as "the premium provider of alternative credit in the UK". 

I retain a "buy" stance

Strong gold prices look likely to persist in the medium term which should benefit H&T, and though I see The Money Shop deal as buying growth prospects it's a logical fit that expands potential.

I continue to subscribe to the principle, pawnbroking can benefit in a recession and "alternative credit" is now established UK lending culture. Altogether the risk/reward profile favours further upside for this "growth at fair price" stock: Buy.   

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.