Stockwatch: Upgrade cycle in full swing at this AIM star

by from interactive investor |

Does another profits upgrade from AIM-listed pawnbroker, gold trader and lender H&T hint at outperformance continuing in 2018, and also an improvement in its rating? 

H&T's pre-close update omits to clarify how far it is ahead, but cites "a strong quarter four performance for pawnbroking and retail" with "another good performance in lending operations... the pledge book up 11% to £46.1 million year-on-year as a result of the higher gold price and an increase in loans on quality watches... the personal loans book up 94.7% to £18.3 million as a result of the expansion in our longer-term, lower-interest rate loan product."

Retail jewellery ranges have been improved with expanded new ranges, in both click-and-collect and online sales. "Demand for our products remains strong and we look to the future with confidence."

Gaining perception as a growth stock

At 345p, up about 15p on the update, H&T's forward price/earnings (PE) is barely in double digits considering forecasts need upgrading again.

When I drew attention with the price testing 300p after strong interims last August, I suggested an upgrade was in the air, but it took until an early November update for management to formally guide this amid ongoing strong trading, also firm gold prices which benefit the pawnbroking scrap and gold purchasing operations.

Consensus rose from £11.6 million pre-tax profit for 2017 to the 12.6 million cited in the table, thus the 2017 PE multiple may now be 11 or so, and dividing a revised earnings growth rate may mean a PEG (PE/growth) rating below 0.5 - a snapshot measure in time if not to be dismissed.

The prospective yield was 3.8% when I drew attention and no dividend upgrade is yet implied, but at about 3.2% currently it's still quite helpful and may be covered nearly 3 times by revised earnings. The risk/reward profile is also supported by 217p net tangible assets per share.

Possibly a sense lingers that H&T shares - previously listed as Harvey & Thompson - have tended to do well in anticipation of recession, or when gold prices rally, then end up volatile along with underlying results.

I refer not just to the five-year table, but awareness of the group as far back as the 1980s; then acquired by Cash America Inc in 1992, when it expanded into unsecured loans.

A 2004 management buyout led to further UK expansion and new financial services products before a flotation on AIM in May 2006 at 172p for a capitalisation of £54 million.

After ten years in its latest listed guise, perhaps one should have expected more for this size business than a doubling or so in value, given a major recession in this period.

Capitalising on investment and a tighter environment

Management says its progress affirms several years' investment in products, staff and systems - establishing it as market leader which bodes well if profit warnings emerging in high street retail portend tougher times ahead.

Additional to wage/inflation pressures, mainstream credit supply appears to have hit something of an inflation point, with the Bank of England encouraging retail banks to tighten up thereby mitigate risks of rising consumer debt - but it has played into H&T's hands.

Demand exists also from modern work practices e.g. "the gig economy", with many more workers on self-employed short-term contracts, creating gaps in personal finances.

The Bank of England's continued monetary stimulus may avert recession and Brexit fears remain overdone, yet the group shows the recent environment is adequate to prosper.

Artemis has raised its stake from 10.5% to 12.9%

While a £16.3 million stake isn't huge exposure for one institution, rising to the second position behind Fidelity with 18.5% late last year marks confidence in medium-term prospects, because a less-liquid small cap would be tricky to exit if its business did falter.

In principle, H&T has a high specific risk for an institution, but in practice Artemis judges it low given the commercial context.

Admittedly, there's scarcity value; the only real alternative being AIM-listed Ramsdens Holdings which floated last springtime and has nearly doubled in market value near 190p, on an historic PE in the mid-teens, net tangible asset support of 74p per share, but no dividend yield.

The two companies have quite similar shares issued - 30.8 million by Ramsden's versus 37.4 million by H&T - with Ramsden's earning power possibly a third of H&T's, and yet H&T is just over twice Ramsden's market value. Thus, on raw comparison, H&T is better value despite a relatively pedestrian record at capital growth.

Both companies have negligible debt, affirming the cash generative profile of this industry. Artemis owns 7.1% of Ramsden's, so appears to see virtue in a meaningful exposure to it as well, though the chance to add H&T to the same extent probably hasn't arisen.

H&T Group - financial summary           Consensus estimates
year ended 31 Dec 2012 2013 2014 2015 2016 2017 2018
Turnover (£ million) 130 99.3 87.7 89.2 94.2    
IFRS3 pre-tax profit (£m) 17.0 6.7 5.5 6.8 9.7    
Normalised pre-tax profit (£m) 17.1 7.7 5.8 6.9 10.3 12.6 14.2
Operating margin (%) 14.3 8.4 7.3 8.3 11.3    
IFRS3 earnings/share (p) 35.5 13.4 11.8 14.9 20.9    
Normalised earnings/share (p) 35.9 16.1 12.7 15.1 22.7 27.6 31.0
Earnings per share growth (%) -26.0 -55.1 -21.2 18.6 50.6 21.8 12.2
Price/earnings multiple (x)         15.0 12.7 11.0
Historic annual average P/E (x)   6.2 10.2 14.6 15.7 13.2  
Price/earnings to growth (x)         0.3 0.6 0.9
Cash flow/share (p) 31.9 42.7 39.8 31.0 3.6    
Capex/share (p) 17.5 6.8 3.0 3.3 5.1    
Dividend per share (p) 10.8 10.2 4.8 6.2 8.4 10.5 11.5
Dividend yield (%)         2.5 3.1 3.4
Covered by earnings (x) 3.3 1.6 2.6 2.4 2.7 2.6 2.7
Net tangible assets per share (p) 186 187 196 205 218    
Source: Company REFS              

Industry risks presently appear contained

H&T's own basic lending criteria is capped at £5,000 over 36 months, to individuals with stable income of at least £750 per month, credit checks undertaken and customers entering into direct debits. Loan rates vary according to customer risk profiles, but the majority are well below the Financial Conduct Authority's price cap for higher-cost, short-term credit.

Jewellery sales are potentially exposed in a recession, but pawnbroking profits should help offset such risk; and gold prices appear supported by political risk such as North Korea and the Middle East generating speculative demand. So, it is hard to envisage from where the group could be dealt any blow. Longer-term it will be necessary to watch what might be Labour party policy to restrict interest rates in this area.

Ongoing EPS likely in a 30p range

Twin upgrades - effectively within six months, despite management's coyness at first - imply a fair chance this momentum continues, taking earnings per share (EPS) to near 30p for the latest year and targeting at least 33p in the medium term, implying a basic price target of 400p if an undemanding multiple of 12 is applied.

2015 and 2016 showed annual average PE multiples of 14.6 and 15.7, yet the business is demonstrably more robust today; so, yes, I'd argue the rating can grind higher too.

H&T might not attract growth stock fervour like the specialist online retailers, but now shows good underlying momentum, and its risk profile involves far less relative downside if markets turn unstable in 2018. Prelims are due 13 March. Buy.

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