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Secure Trust Bank+ (STB, House Stock at 658p) - On an upwards trajectory
Secure Trust Bank Plc
Good u/l FY23 performance – FY23 u/l PBT was up 9% yoy to £42.6m (+1% vs. FactSet consensus). This was driven by operating income up 9% yoy to £184.7m, partly offset by operating expenses up 7% yoy to £99.7m (in-line with our expectations) and cost of risk up 13% yoy to £43.2m (9% lighter vs. our expectations and stable in relative terms at 1.4%). Reported EPS was down 28% yoy to 129.6p, predominantly driven by exceptionals relating to Borrowers in Financial Difficulty as well as corporate activities, driving FY DPS to 32.2p. The Group’s capital position remained solid with a CET1 ratio of 12.7%. +4% adj. PBT upgrade in outer year – The Group has delivered strong loanbook growth across all divisions during the period. This, together with further strategic progress made during the period, underpins the maintained medium-term targets. Additionally, the Group has now moved to a progressive dividend policy, which should avoid the impact from exceptional items going forward. We update our forecasts on the back of the Group’s results and, whilst keeping our FY24E adj. PBT expectations flat, upgrade FY25E by 4% based on better opex and cost of risk expectations. We also implement the Group’s revised dividend policy which implies attractive >5% dividend yields going forward. Reiterate Buy rating on new 1,786p TP – We are encouraged by the Group’s u/l performance and strategic progress and continue to believe that regulatory concerns are overdone given limited historic loanbook exposure. As a result of our revised forecasts, we increase our TP to 1,786p (from 1,736p, previously) and reiterate our Buy rating.
Expect good underlying performance – The Group has already reported net lending up 14% yoy to £3.3bn and deposits up 14% yoy to £2.9bn as well as net interest margins in-line with the first half. As a result, we expect STB to deliver net interest income of £170m and total operating income of £190m. Based on a C/I ratio of 52.4% and CoR of 1.4%, we forecast the group to deliver adjusted PBT of £42.9m (up 10% yoy), and £40.4m on a reported basis. Consistent with the group’s existing dividend policy, we forecast a full year dividend of 39.0p, and the Group’s CET1 at c.13.0%. Medium-term targets expected to be reaffirmed – Alongside the results, we anticipate the Group reaffirming its medium-term targets which include a £4bn loan book, a C/I ratio of 44-46%, and a RoAE of 14-16%. Delivery on these would imply material upside to our conservatively set forecasts which already assume a 19% CAGR in underlying PBT over the FY22-25E period. Regulatory uncertainty likely to remain in focus – Beyond the results, we expect investors to focus on the Group’s exposure to the changing regulatory environment, and specifically its exposure to motor finance commissions. Whilst we do not expect full clarity on the impact of the discretionary motor finance commissions review until Q3’24, we continue to believe concerns in this regard are overdone given STB’s previous disclosure that only a mid-single digit proportion of new vehicle finance loans included discretionary commission arrangements between 2014 and 2017. Reiterate Buy rating – We value Secure Trust Bank on a dividend discount and justified P/B basis, underpinning our 1,736p TP. We believe the shares are significantly undervalued at current levels and see PERs of 3-4x, well below its long-term averages, as failing to reflect the Group’s attractive growth and margin improvement potential. We reiterate our Buy.
Following a reprioritisation of resources, we are discontinuing coverage of Secure Trust Bank. Our last recommendation was Buy and our last target price was 1,000p.
Secure Trust Bank’s (STB’s) Q423 trading update showcased a robust performance with net loans of £3.3bn, up 13.6% y-o-y. The bank reaffirmed that it is on track to deliver £5m in annualised cost savings in FY24 through its ongoing cost optimisation programme. Despite rising deposit costs, STB’s net interest margin (NIM) remained flat with H123 at 5.4%. STB’s disclosure of modest exposure to discretionary commissions in motor finance lending should be a relief to investors, as the ongoing Financial Conduct Authority (FCA) investigation has been an uncertainty overhanging the sector. Our underlying continuing PBT estimates fell by 2% on marginally lower NIM expectations. Meanwhile, we have reduced our continuing PBT estimate by 7% to £41.7m as we have included a £2.3m exceptional cost related to the FCA’s Borrowers in Financial Difficulty industry-wide review. Our FY24 estimates are unchanged.
Secure Trust Bank+ (STB, House Stock, 672p) - Q4 trading update and new Chair
Further Loanbook & Deposit Growth – Net lending up 3.2% qoq to £3.3bn (in-line with INVP estimates), underpinned by growth across all business areas during the quarter and new business lending of £579.3m (+30% yoy). Deposits were up +5.5% qoq to £2.9bn, which is ahead of our expectations and underpins continuous loanbook growth efforts into 2024. Limited Historic Loan Exposure to Regulatory Initiatives – The FCA’s regulatory initiatives with focus on vehicle finance have sparked uncertainty within the sub-sector. We note, however, that only a mid-single digit proportion of STB’s new vehicle finance loans between 2014-17 included discretionary commission arrangements. These were stopped well ahead the FCA’s ban in 2021. Whilst next steps won’t be announced until Q3’24, we take comfort in the Group’s limited historic exposure. Additionally, STB is engaged in formal discussions with the FCA about its collections processes, procedures and policies within vehicle finance following the FCA’s review of Borrowers in Financial Difficulty across the industry, which we reflect in the form of £2.5m of exceptional operating costs for FY23E in our forecasts. Board Appointment – STB announces that Jim Brown will join as NED from 31 March; he is expected to subsequently succeed Lord Forsyth as Chairman following the conclusion of the AGM, subject to regulatory approval. Model Update & Reiterate Buy Rating – We update our forecasts on the back of the Group’s trading update and reduce our FY23E u/lying PBT by c.3% as a result of lower net interest income, part offset by better cost savings during the period. We reiterate our Buy rating on our new £17.36 TP.
In its Q323 trading update, Secure Trust Bank (STB) posted 1.7% q o q growth in net lending alongside 2.6% growth in its deposits. This was despite a 7% fall in new business lending from an elevated Q223 comparable as consumer spending weakened. More importantly, STB also hosted a capital markets day (CMD), where management reiterated the medium-term 14–16% return on average equity (RoAE) target and presented on the V12 Retail Finance business in detail. The RoAE should be supported by an improved mix weighted towards Retail Finance, combined with moderated volume growth and greater cost efficiency. Project Fusion is developing well and has now been extended to deliver annualised savings of £5m by the end of FY24. We have only changed our estimates for the issue of 0.2m shares under the employee share plan.
Secure Trust Bank+ (STB, House Stock at 606p) - Treble your money
V12, a technology enabled retail lending business – V12 Retail Finance operates on a proprietary technology platform that enables a largely digitalised customer journey, which has ultimately allowed for attractive loan book growth whilst maintaining cost efficiencies. The Group has significantly expanded its market share and it aims to grow this further, to mid-teens from its current 13% level. Although unsecured, the Group predominantly operates in the relatively lower risk furniture and jewellery segments, which are underpinned by attractive and improved levels of credit quality, with cost of risk at c.1.6% p.a. The roll-out of AppToPay provides further growth opportunities and competitive dynamics are attractive, with relatively less sensitive pricing dynamics. A clear path to 14-16% RoAE – The Group has provided further clarity, as well as updates, to its medium-term targets, with the aim of generating its 1416% RoAE targets on the back of a £4bn loan book and improved cost/income ratio expectations of 44-46%, as well as unchanged 5.5-5.7% NIM and 1.3-1.5% cost of risk targets. Whilst the Group has not given a hard and fast timeline, amidst the currently more challenging market environment, we see scope for it to deliver this towards the back end of our forecast period. Reiterate Buy Rating – We summarise our key takeaways overleaf and refer to the Group’s capital markets event documents (available here) for further detail. We are encouraged by the demonstrated quality inherent in the retail finance business, as well as the additional clarity on the Group’s journey towards 14-16% RoAE. We reiterate our Buy rating.
The trading update is reassuring, although the implied slower loan growth might logically delay achieving the 14-16% ROE goal. However, in our view the valuation is too low at c.0.3x TNAV. We reiterate Buy, TP 1,000p.
Loan Growth – Secure Trust Bank’s customer loan book is up 1.7% QoQ and +14.2% yoy to £3,212.2m, driven by strong growth in Commercial Finance (+16.4% QoQ) as well as Consumer Lending (+1.1% QoQ), whereas Real Estate Finance remained flat over the period. Although new business lending was down 7.3% QoQ (+15.3% YoY), largely driven by reduced new business volumes in Consumer Finance, STB’s Business Finance divisions saw new business lending up 29.8% QoQ (+62.5% YoY), underpinning once more the attraction of the Group’s diversified lending approach. Deposits & Costs – Deposits for the period were up 2.6% QoQ (+15.7% YoY), supporting the Group’s loan book growth. Additionally, the Group remains on track to deliver £4m annualised cost savings in the current year, rising to £5m in FY24. Medium-Term Targets Reaffirmed – In addition to trading in-line with our FY23E forecasts, the Group has reaffirmed its medium-term 14-16% RoAE target, now aiming for a £4bn loanbook (in-line with our expectations) as well as a 44-46% C/I ratio (vs. <50% previously and ahead of our FY25E C/I). Capital Markets Event – Secure Trust Bank will host a capital markets event with a focus on V12 Retail Finance and its pathway to delivery of its medium-term targets at 11am today. Reassuring Update Underpins our Buy Rating – Given that the Group is trading in-line with our current year expectations, we leave our forecasts unchanged but see scope for upgrades on better-than-expected C/I ratio targets further down the line. We reiterate our Buy rating.
Secure Trust Bank+ (STB, House Stock, 600p) - Q3 trading update and CMD
Secure Trust Bank^ (STB, Buy at 594p) - Appointment as Joint Broker
Specialist UK Bank – Founded in 1952, Secure Trust Bank has evolved into a specialist UK bank, with the current management team having streamlined the business structure and set a credible near- to medium-term growth strategy. Strong Growth Potential & Efficiency Improvements – Despite more challenging market and macro backdrops, we see further loanbook growth, cost optimisation, and relatively stable NIMs driving an attractive PBT CAGR of c.19%. Continuous focus on costs as part of the Group’s Project Fusion cost efficiency programme, in addition to loan book growth, is expected to drive attractive improvements to Secure Trust Bank’s cost/income ratio, and we estimate the achievement of its <50% C/I ratio within our forecast period. Solid Balance Sheet & Excess Capital Provide Opportunities – Secure Trust Bank is well capitalised, providing attractive growth headroom in the medium-term. Its capital position, which is comfortably in-line with the Group’s >12% CET1 ratio target suggests c.£25m of excess capital (equating to c.20% of market cap). We believe this provides the Group with potential to further drive its organic growth trajectory and allows for potential acquisitions to support this. Meanwhile, we expect return on average equity towards the medium-term target of 14-16% over the forecast period. Significantly Undervalued, Initiate at Buy – We value Secure Trust Bank on a dividend discount and justified P/B basis, underpinning our 1,745p TP. We believe the shares are significantly undervalued at current price levels and see PERs of 3-4x, well below its long-term averages, as failing to reflect the Group’s attractive growth and margin improvement potential. We initiate at Buy.
In its H123 results, Secure Trust Bank (STB) delivered an 11% y o y increase in operating income, overcoming margin pressure on rising interest rates. However, PBT was £16.5m, 4% lower than in H122 as the bank incurred a one-off impairment charge of £7.0m stemming from a long-standing debt case in Commercial Finance. Excluding this charge, PBT was £23.5m, which implies a 6% beat on our estimates on an annualised basis. Across the group, underlying impairments are resilient, especially in Vehicle Finance where impairments fell to 2.4% (H122: 8.0%) as lending shifted to prime borrowers. We have increased our FY23 and FY24 continuing PBT forecasts to £45m and £55m respectively, leaving the stock trading at P/E ratios of only 4.0x in FY23 and 3.1x in FY24.
Secure Trust Bank^ (STB, Buy at 598p) - Valuation anomaly
The combination of positive momentum and an exceptionally cheap valuation make STB an attractive investment in our view. Our raised target price of 1,000p (from 989p) provides material potential upside, and we stay at Buy.
Guidance is for sharply improved profits in 2H23 (after PBT of £16m in 1H23) and there is upside pressure on our top of the range estimates for 2024 and beyond as loan book expansion will drive higher than expected income. In our view, positive momentum is not captured in the valuation.
Secure Trust Bank^ (STB, Buy at 578p) - H1 results show strong loan book growth
Secure Trust Bank (STB) announced a robust trading update with net lending exceeding £3bn, driven by a 17.7% sequential increase in new business lending. Deposits also significantly increased year-on-year by 16.2%. STB has expanded its capital position through the issuance of £90m tier 2 capital bonds, which is now complete. The augmented capital will provide the bank with growth opportunities in its lending activities. Management states that STB is trading in line with expectations and remains confident in delivering on FY23 and medium-term targets as well as improving its cost income ratio by the end of the year. We maintain our estimates for FY23 and FY24 and highlight that STB should be trading at c 0.45x price-to-book value (P/BV), based on our FY24 estimates, to be fairly valued compared to peers. STB currently trades at a P/BV of 0.31x.
Good performance, low valuation – STB’s business momentum has persisted in spite of sluggish economic conditions and conservative management actions. We remain at Buy with >50% potential upside to our 989p TP.
Secure Trust Bank^ (STB, Buy at 634p) - A good start to the year
Secure Trust Bank (STB) beat expectations in FY22 as it continued its strategy of growing exposure to prime lending products and utilising its proprietary technology. Driven by prime lending growth, operating income from continuing operations rose 14% to £169.6m which, combined with the ongoing cost efficiency programme, led to 28% pre-impairment PBT growth. PBT from continuing operations fell to £39.0m (£55.9m) as impairments normalised following one-off releases which benefited STB in FY21. STB shows positive signs of increasing its market share in the prime lending segment, which we reflect in our FY23 and FY24 forecasts.
We are making only limited changes to estimates and our target price (from 991p to 989p), but note the improved efficiency as a key driver of future value. The valuation remains low, and we we see significant upside potential to our TP. We retain our Buy recommendation.
Strong performance, low valuation. The low rating of the shares (0.4x P/TNAV, 4x forward PER) does not recognise the attractive growth and return characteristics of the shares and upside is significant. Buy.
The new Tier 2 issue removes refinancing issues and provides further headroom for growth. We expect the investment case to refocus back onto fundamentals, which we believe are not reflected in valuation multiples. We reiterate our Buy recommendation.
In its FY22 post-close trading update, Secure Trust Bank (STB) announced that business has been trading in line with management expectations and with good momentum. Continuing profit before taxes and impairments was ‘significantly’ up, while its cost to income ratio ‘improved markedly’. Core loans rose by 19.1% y-o-y (we forecast 13%), with strongest growth in consumer finance as expected. New business lending did drop 11% y-o-y for Q422 as the bank tightened its lending criteria (as previously flagged by management) due to macroeconomic concerns. Loan arrears are back to pre-pandemic levels in vehicle finance and at record low levels in retail finance. This reflects STB’s repositioning to more prime segments and the de-risking of its loan book over the last few years. STB stated that its FY22 net interest margin percentage remained stable versus H122 despite rising funding costs (this matches our expectation).
Compelling valuation. STB is trading at c.0.4x TNAV, which implies a level of stress not visible in this update. We view STB as significantly under-valued and retain our Buy recommendation and 991p target price.
We are adjusting our forecasts for Secure Trust Bank (STB) to better reflect the deteriorating economic outlook in the UK. We have raised our FY22 forecast for PBT from continuing operations by 1%, but reduce it by 15% in FY23. Lower loan growth in 2023 is the key driver; we now estimate growth of 13% in FY22 and 7% in FY23. The impairment charge rate for FY23 has been upped from 1.3% to 1.4%. We have also raised our run-off cost estimates in discontinued operations by £2.6m and £2.0m for FY22 and FY23. Despite our lower FY23 forecasts, the estimated ROE of 9% in both years shows strong business resilience given the cyclical nature of the banking sector. We have maintained a dividend payout ratio of 25% in line with to company policy. STB’s capital position remains comfortable with a CET1 ratio of 14.2% in FY22 and 13.7% in FY23.
Market conditions are softer than anticipated when we last updated numbers and we reduce loan growth estimates, especially for 2023E. No change to medium-term targets. We view the medium-term prospects as unchanged, albeit delayed by economic circumstances. As the environment deteriorates, the likelihood of Secure Trust Bank (STB) being involved in industry consolidation increases in our view. STB’s depressed valuation already discounts the effects of slowing markets and we look instead at the significant c.34% upside to our new TP of 991p based on revised expectations. We repeat our Buy recommendation. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com, Ryan.Flight@peelhunt.com
Prudent management of the growth profile Secure Trust Bank (STB) traded in line with expectations in 3Q22 and we leave FY22 estimates unchanged. Market conditions have deteriorated since we last updated estimates and tightening credit underwriting leads us to project lower loan growth for 2023 and 2024. This leads to EPS falling 11% in 2023 and 9% in 2024. Our TP falls 22% to 1,145p due to lower forecasts and a higher discount rate. We remain at Buy given significant share price upside and low valuation multiples. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com, Ryan.Flight@peelhunt.com 5-page note
In its Q322 trading update, Secure Trust Bank (STB) said business has been trading in line with management expectations. Loan demand has remained strong in its consumer finance niches. However, the bank says it is slowing growth, tightening lending criteria and increasing its focus on operational efficiency to reflect macroeconomic uncertainty. Total loans in Q322 grew 21.5% y-o-y to £2,813m; we are forecasting 15.8% increase for FY22. Asset quality has remained good while the net interest margin remained stable at 5.7% in the face of rising interest rates.
3Q22 in line; share price falls seem overdone Although demand remains buoyant, management has slowed lending growth in 3Q22 in response to the deteriorating UK economic outlook. This had been previously flagged and we leave FY22 estimates unchanged. Trading at <0.4x TNAV, the share price is discounting a meltdown which is not happening, and we view the valuation as fundamentally too low. Buy. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Secure Trust Bank (STB) reported H122 PBT of £24.7m, including an £8.1m gain on the disposal of its Debt Managers Services (DMS) unit. Reported return on equity (ROE) was 12.5%, and the underlying ROE was 8.3%. Pre-provision operating profit was up 22% y o y driven by a 23% increase in core loans. Underlying earnings were down 52% y-o-y as impairments returned to a normal level (annualised 1.4% of loans in H122) after the unusually large COVID-19 related loan reversals in H121. STB’s capital position remains strong (CET1 14.0%), but we expect the deteriorating UK economic outlook to lead STB to pare down its balance sheet expansion. We are reducing our forecasts to reflect this slowdown: we have cut EPS in FY22e by 6% and FY23e by 12%. Despite the cut, momentum is still good; we forecast a 13% increase in loans in FY23 with a 29% increase in underlying earnings and 11.6% ROE. We have reduced our fair value (FV) from 2,491p to 2,407p, as we have cut our sustainable ROE assumption from 13.5% to 13% due to macro concerns.
Secure Trust Bank’s (‘STB’) H1 results revealed an 86% yoy increase in new business lending which drove a 12% YTD increase in the net loan book. We question whether the group is growing too fast into an economic downturn, while noting that it is consuming capital in doing so ahead of a tier 2 bond refinancing. Although building scale is important to driving RoE higher, we are concerned that the group could take on too much credit risk in the process. As a result, we are becoming less enthusiastic about the stock and moderate our fair value to 1,600p (from 1,900p) accordingly, although we retain our BUY stance given there is still 42% upside to fair value.
1H22: running hard to deliver on targets Secure Trust Bank’s 12.2% Core loan growth in the 6M to end-June 2022 confirmed it as the fastest-growth UK lender under our coverage. Although growth might moderate in 2H22E, management’s medium-term target of a 15%+ CAGR appears achievable. We reduce our target price from 1,600p to 1,470p, still providing significant potential upside. We retain our Buy recommendation. Robert.Sage@peelhunt.com,Stuart.Duncan@peelhunt.com 8-page note
1H22: lending boom For 1H22 Secure Trust Bank has reported strong growth metrics as new business volumes nearly doubled, Core loan balances grew 12% and profit pre-impairment rose 22%. We remain comfortable with our estimates and keep our Buy recommendation given strong momentum in the business. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Secure Trust Bank disclosed in its Q122 trading update that balance sheet momentum is strong and the business remains on track to deliver on management’s medium-term growth targets. Loan and core loan growth were 4.5% and 4.8%, respectively, in the three months to 31 March. We are forecasting 17% and 18% growth for the full year. Deposit growth was similarly fast paced with a 4.1% increase in the three months and on track for our forecast of 17% for FY21. We note, however, that the economic slowdown may lead us to ease some of our balance sheet growth forecasts later this year.
Secure Trust Bank (STB) reported FY21 PBT of £56.0m (£57.4m normalised, we forecast £52.7m) and a ROE of 15.9%. The beat was driven by provision reversions: the loan loss ratio was 0.1% versus 0.3%. The numbers otherwise were in line with our expectations. Revenue was flat year-on-year, but pre-provisions profit fell by 18% since costs rose 12% as STB invested for growth. We are forecasting 15–17% annual loan growth for FY22–23 as management sees good risk-adjusted opportunities despite the inflation uncertainty. This is backed by a strong capital base (CET1 14.5%) and good returns (forecast ROE of 10.2% and 12.3% for FY22e and FY23e). We have increased our fair value to 2,491p/share (from 2,234p) mainly due to rolling the model forward one year.
Growth confirmed Profits rebounded sharply in 2021 as impairment charges fell. Although we expect the cost of risk to normalise in 2022, lending growth is now running at targeted medium term levels (>15% on average), which should lead to a resumption in strong income growth. Valuation multiples remain low relative to this growth rate, and we retain our Buy recommendation and 1,600p target price. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 7-page note
Secure Trust Bank’s (STB) recent (24 March) full year results to 31 December 2021 showed a significant recovery in profitability, driven by a much lower impairment charge. However, headwinds caused by the cost-of-living squeeze see us lower our FY22F adj. EPS forecast by 19% to 171p. Nevertheless, we continue to see excellent value in a stock which trades at just 0.8x trailing NAV despite management targeting a medium-term return on equity of 14-16%. BUY
Strong 2021 results, risks rising Secure Trust Bank (STB) has announced a near trebling of PBT for 2021 as impairment charges fell, although the risk environment has increased recently and we will likely revise down our 2022 earnings forecast to factor in a higher cost of risk. Loan growth remains strong and STB’s low valuation multiples mean we still see value in the shares and retain our Buy. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Secure Trust Bank (STB) disclosed on 11 March that it is exiting the debt purchase market by agreeing to sell its Debt Managers Service (DMS) portfolio to Intrum UK Finance, a debt purchase specialist. The deal is expected to complete towards the end of Q222. DMS accounts for 4% of STB’s loans balance and STB disclosed that DMS made a small £0.5m loss in 2021. The deal looks to be earnings enhancing. STB estimates that £72m of risk weighted assets will be released (about 50bp of capital), which is useful – our forecast FY22 pre-deal CET 1 was 12.3%. The sale seems consistent with the new management team’s aim to focus on ‘specialist lending segments that have the strongest prospects for delivering sustainable and profitable medium to long-term growth’. STB will report its FY21 results on 24 March and update its medium-term targets to reflect the sale (STB expects a better cost income ratio, but with a reduced net interest margin due to the loan mix change), having already released an upbeat pre-close statement on 14 January.
Further focusing of activities strengthens the growth profile Secure Trust Bank (STB) has announced the sale of debt purchase loans to Intrum, which should strengthen capital, improve returns and underpin growth ambitions. We retain our Buy recommendation and 1,600p target price. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
STB disclosed in its pre-close trading update that loan growth is strong and ahead of our forecasts. STB said that it saw a record level of new business lending in Q421 at £471.1m (+52% year-on-year). The core loan balances were up ‘by double digits’ year-on-year versus FY20, compared to our forecasts of 6% (core loans) and 2% (total loans). There were no new statements regarding margins or asset quality, although the news regarding the latter was quite upbeat in the Q3 update. We take note of the positives in this statement and will wait for the release of the full set of results on 24 March to update our model and estimates.
4Q21: picking up the pace In 4Q21, Secure Trust Bank (Secure Trust) wrote record levels of new business and loans are now growing above the newly set 15% medium-term growth target. As upside pressure to estimates builds, the shares continue to trade at undeservedly low valuation multiples, in our opinion, and our target price of 1,600p lies considerably above the share price. Buy. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Strengthened conviction in the Buy case Secure Trust Bank’s (STB) CMD confirmed growth drivers are gaining traction and could propel future performance not captured either by current estimates or the stock price. We reiterate our Buy recommendation and see upside to our TP of 1,600p. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 7-page note
Secure Trust Bank (STB) announced that it has acquired AppToPay for an undisclosed ‘small amount’ and plans to use AppToPay’s proprietary technology platform to develop and grow its digital Buy Now Pay Later (BNPL) business. STB has also disclosed that its FY21 loan impairments will be ‘materially below’ analyst consensus of £12.9m (Edison: £12.7m). This is welcome news, although most investor attention regarding impairments has moved to focus on FY22. We are adjusting our FY21e EPS by 7% to 226.5p due to our now reduced £7.9m impairment estimate. All our other assumptions are unchanged, as detailed in our August 2021 update note, Good news as flagged. Our fair value remains 2,234p.
Bolt-on acquisition accelerates strategy; profit upgrade Secure Trust Bank (STB) is entering the Buy Now Pay Later (BNPL) market through the acquisition of the AppToPay platform. This accelerates an existing plan at a low cost. Current year profits are also guided higher due to lower loan losses. Buy. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Secure Trust Bank has announced a small acquisition that will bolster its capability in Buy Now Pay Later (‘BNPL’) ahead of a new digital product launch next year. In addition, the supportive economic backdrop means that the full year impairment charge is expected to be materially below consensus resulting in profitability above the top end of the current range.
Trading Comments 25 November 2021 COMPANIES DISCUSSED IN TODAY'S EMAIL Issuer Sponsored MOTORPOINT GROUP+ (MOTR, House stock, 357p) - Material short-term upgrades, demanding medium term targets remain unchanged CLIPPER LOGISTICS+ (CLG, House stock at 652p) – Joint venture with Clipper and Farfetch to create a global e-fulfilment solution MACFARLANE GROUP+ (MACF, House Stock at 132p) – Q3 Trading - managing effectively, upgrade JOHN MENZIES+ (MNZS, BUY at 282.5p) – Significant Contract: easyJet Renews BRANDSHIELD+ (BRSD, House Stock, 18p) – BrandShield Report Shows Spike in E-Commerce Fraud PREMIER AFRICAN MINERALS+ (PREM, House Stock, 0.19p) – Zulu drilling update FTSE 250 HILL & SMITH^ (HILS, HOLD at 1,866p) – Trading update – in line, pricing power remains strong FTSE SmallCap XPS PENSIONS^ (XPS, Buy at 146p) – Interim results in line AIM ORIGIN ENTERPRISES^(OGN, Buy at €3.23) – Q1 trading update; strong start to FY22F FTSE – no index SECURE TRUST BANK^ (STB, Buy at 1,300p) - Small acquisition bolsters capability in BNPL + positive trading update MOTORPOINT GROUP+ (MOTR, House stock, 357p) - Material short-term upgrades, demanding medium term targets remain unchanged Motorpoint’s interim results for the 6 months to 30th September are record breaking and reflect very well on the Group’s ability to traverse what remain unusual and volatile market conditions. Whilst said conditions have undoubtedly supported sales in the nearly new market, availability has been a challenge which has brought to the fore Motorpoint’s flexible, agile and brand agnostic model, in our view. With H1 22 sales and margin strongly ahead, we are upgrading our FY22 CPTP forecast by c22% to £21.5m, EPS of 18.7p. For the medium term we leave forecasts unchanged, forecasts which continue to reflect management’s strategic target to double the £1bn of pre Covid sales over the medium term, and so already have strong ongoing growth baked in. With growing evidence of traction on Motorpoint’s journey to become a digitally lead, omnichannel retailer, confidence grows on delivery. HOUSE STOCK. Darren Shirley – 0151 600 3702/ Clive Black – 0151 600 3701 darren.shirley@shorecap/ clive.black@shorecap.co.uk CLIPPER LOGISTICS+ (CLG, House stock at 652p) – Joint venture with Clipper and Farfetch to create a global e-fulfilment solution Clipper Logistics plc, a leading provider of e-fulfilment and returns management services and other value-added solutions to the retail sector, and Farfetch Limited (NYSE: FTCH), the leading global platform for the luxury fashion industry, has announced they have agreed to establish a joint venture company, formalising the creation of a global e-commerce fulfilment solution for luxury brands. The joint venture will create a unique logistics offering for inventory from Farfetch’s group of companies including Browns and New Guards Group, as well as products from other luxury brands, that will specialise in the complex and highly demanding fulfilment requirements of the global luxury goods sector. By combining Clipper’s expertise in full end-to-end online logistics and technical solutions with Farfetch’s carrier and duty management systems, and deep expertise and relationships in the luxury industry, the joint venture will offer a world-class, global fulfilment solution specifically focussed on the needs of luxury businesses. The joint venture, which is expected to launch in early 2022 subject to relevant regulatory approvals, will offer online fulfilment services in key luxury territories in Europe, Asia and North America with plans to further expand in the medium term. Farfetch and Clipper will each own 50% of the joint venture. In our view, this announcement is highly positive for the Group, extending its relationship with Farfetch in the luxury goods sector and global e-fulfilment solutions. According to the Chairman “it will create a unique and fully integrated international offering for stock from Farfetch’s group of companies including Browns and New Guards Group, as well as stock from other luxury brands. As consumer behaviours evolve and a rising number of high-end purchases are made online, we are proud to help luxury brands accelerate growth in the online retail space. This Joint Venture is fully aligned with our global ambition and another transformational step forward for Clipper as we innovate the logistics space.” House Stock + Shore Capital Markets acts as joint broker to Clipper Logistics. In line with our conflicts of interest policies, we do not have recommendations on ‘house stocks’ Peter Ashworth – 020 7601 6112 / Clive Black - 0151 600 3701 / Robin Speakman - 0151 600 3712 peter.ashworth@shorecap.co.uk / clive.black@shorecap.co.uk /robin.speakman@shorecap.co.uk MACFARLANE GROUP+ (MACF, House Stock at 132p) – Q3 Trading - managing effectively, upgrade Macfarlane Group, the leading protective packaging solutions specialist, servicing clients across the UK and now emerging into Continental Europe, has issued a trading update this morning (25 November) covering the period since end June and the year to date. Trading has continued to be robust in a difficult supply chain environment and the Group now expects to exceed its previous expectations for the full year. Sales growth for the year to date has accelerated through to October at rate of +25% over the corresponding period in FY20A. This is set to have a positive impact on the operating margin performance also; cash generation is noted to be strong and above our expectations. The outlook for the rest of the year to end December continues to present challenges for the packaging industry, noting input price cost inflation, raw material supply constraints, staffing pressures and some customers supply chain issues impacting their level of demand. This said, we note the positive management track record at Macfarlane in handling these issues. We tickle up our forecasts again. House Stock. Forecast upgrades The Group’s resilient business model, market-leading positioning (with its value-add products and services) and management’s adaptive strategy (and quality), has come to the fore once again, in our view. The Group’s performance since its HY results in August (note we upgraded our revenues by c10%, adj. PBT by c14% and adj. dil EPS by c14%) reflects this. Despite continued uncertainties, we upgrade our FY21F revenue by a further c.2% to £280m, adj. PBT by £0.5m to £20.7m and adj. dil. EPS by 0.2p to 10.5p. With two months to go, a stronger FY performance remains a possibility at next February’s results. At this juncture, we continue to take a conservative approach with our FY22F and FY23F estimates, especially on margins, and expect FY22F adj. PBT of £21.1m (adj. dil EPS 10.7p) and FY23F adj. PBT of £21.5m (adj. dil EPS 10.3p – higher UK tax charge). We will review our FY22/23 forecasts in-depth at the FY results. Valuation thoughts. Momentum remains with Macfarlane and the sector, in our view, reflecting the ongoing structural shift to ‘online’ and recovery in industrial markets post-pandemic. Noting its solid platform for growth, the outlook and long-term opportunity in protective packaging solutions looks bright to us. With minimal bank debt, Macfarlane trades on an FY21F PER of 12.6x (EV/EBITDA 7.9x), a FCF yield of 6.7% and a dividend yield of 2.2%. We continue to see value in the stock supported by cash flow analysis and noting the fundamental valuation ratios of peers such as Bunzl and DS Smith. We continue to assert short-term fair value in the 150p range. HOUSE STOCK. +Shore Capital Stockbrokers is broker to Macfarlane Group. As part of its conflicts of interests policy Shore Capital does not make a formal recommendation on house stocks. Robin Speakman 0151 600 3712 / Akhil Patel 0151 600 3719 robin.speakman@shorecap.co.uk / akhil.patel@shorecap.co.uk JOHN MENZIES+ (MNZS, BUY at 282.5p) – Significant Contract: easyJet Renews Coming shortly after the welcome contract award in the Americas with Aeromexico, Menzies announces another significant contract this morning. The aviation services specialist has announced that existing client easyJet has extended long-standing ground services partnership with Menzies at 21 airports across Europe. This is a large bundle of contracts for ground handling services representing in excess of 80,000 turns annually. Accordingly, these strategic contracts to operations come with associated revenues in total into the £000’s m. We believe that over the book of contracts this extends the average duration by three to four years. Very welcome news then and improving visibility onwards from next year as Menzies recovery continues. Under the contracts, Menzies provides a range of ground services including: passenger, ramp, cabin cleaning and de-icing. The relationship with easyJet dates back over 15 years, including handling services at the airlines base at London Luton Airport. Valuation thoughts To our minds, this renewal is a significant win for Menzies, an example of de-risking for investors, underpinning the continuing recovery from the pandemic. We continue to assert that Menzies is poised to recover strongly from the pandemic, with its finances secure, and as a leader in aviation services globally. With visibility emerging on FY22F, with revenues and profitability building, we believe that our view on earnings and net debt progression remains founded on suitably cautious assumptions. Menzies trades on a FY2022F PER of 7.3x, EV/EBITDA of 4.2x. Observing positive leverage potential from recovery and a return to real underlying growth, we retain a BUY stance. *** This is issuer sponsored research. Shore Capital has a limited agreement with John Menzies plc to provide certain research and marketing services *** Analyst: Robin Speakman 0151 600 3712 robin.speakman@shorecap.co.uk BRANDSHIELD+ (BRSD, House Stock, 18p) – BrandShield Report Shows Spike in E-Commerce Fraud The digital brand protection and online threat hunting solutions specialist has today announces new data regarding the rise of e-commerce fraud showing that domain registrations relating to popular electronic brands and consumer products increased dramatically in the run up to the Black Friday/Cyber Monday shopping period. PlayStation and Nike were the first and second most targeted brands, with suspicious related domain registrations increasing by 127% and 88% respectively. Suspicious domain registrations for Airpods increased 81% over the same period. The report also found that online stores for big-box retailers and online marketplaces were popular targets for cybercriminals, with suspicious domain registrations related to online retailers increasing markedly. Target, BestBuy, and Costco saw domain registrations increase by 138%, 89%, and 141%, respectively. By releasing this data, BrandShield is raising awareness and has also provided consumers with a number of tips to help combat the mounting threat of seasonal shopping fraud analysed within their report. This includes being aware of typos within website URLs, grammatical or spelling errors across websites, text or private messages through social media platforms, negative reviews and padlock images to the left of a URL on the web browser, all of which indicate that the website is likely to be fraudulent. As we have previously opined, the market for online brand protection and ancillary services is poised for significant structural growth, in our view. Organisations increasingly need to defend themselves against fraudulent online activity including phishing, brand impersonation, counterfeiting, IP infringement and executive impersonation. As a result, BrandShield’s software solutions are likely to experience growing demand given, inter alia, the Company’s established market credentials, high renewal rates, ‘done it before’ management team and imminent step up in sales and marketing. BrandShield already has a broad range of customers (including some in the Fortune 500 and FTSE100) and increasingly acts for larger customers with dozens to hundreds of brands. Shore Capital acts as joint broker to Brandshield. In line with our conflicts of interest policies, we do not have recommendations on ‘house stocks’. Analyst: Martin O’Sullivan – 0207 468 7925 martin.osullivan@shorecap.co.uk PREMIER AFRICAN MINERALS+ (PREM, House Stock, 0.19p) – Zulu drilling update Premier African Minerals (“PREM”), the multi-commodity exploration and development company focused on Southern Africa with its RHA Tungsten and Zulu Lithium and Tantalum (“Zulu”) projects in Zimbabwe, has provided an update on its Zulu project. To date, PREM has drilled 24 holes totalling 4,190m at Zulu with 11 complete hole sample sets plus an additional 499 samples pending assay results. Some of these samples include a step-out zone not previously included in the mineral resource estimate nor the exploration target assessment. The Zulu project remains a priority within PREM’s diverse portfolio and the Company has previously delineated a maiden Inferred resource estimate of 20.1Mt grading 1.06% Li2O and 51 ppm Ta₂O₅ (using a cut-off grade of 0.5% Li₂O). We are encouraged with the additional pegmatite intersections outside of the existing mineral resource estimate and look forward to the pending assay results. In the meantime, we note the YTD rise in spodumene import prices in China with Bloomberg reporting a 445% increase in spodumene concentrate (5% Li2O) China CIF from the January 2021 low of US$405/t. We expect this trend to continue on the back of increased global demand for electric vehicles. As such, we look forward to further updates on Zulu as PREM progresses the various workstreams required for the DFS. House Stock. +Shore Capital acts as Broker to Premier African Minerals. In line with our conflicts of interest policy we do not have a recommendation on ‘house stocks’. Analyst Sheldon Modeland – 0207 601 6117 Sheldon.modeland@shorecap.co.uk HILL & SMITH^ (HILS, HOLD at 1,866p) – Trading update – in line, pricing power remains strong This morning, Hill & Smith announced that revenue in the four-month period ended 31 October 2021 was £237.1m, 4% ahead of last year on an organic constant currency basis. The group remains on track to deliver underlying operating profit in line with the company-compiled consensus, £85.9m. Price increases have been implemented to offset input cost inflation, most notably in relation to steel. Supply chain headwinds, including a reduced availability of materials and labour, are continuing to be managed appropriately. Net debt was £154.2m at 31 October 2021 (30 June 2021: £154.6m). The group was cash generative in the period, which included a £13.9m payment of the 2020 final dividend. Roads & Security - the division has benefited from a range of RIS1 and RIS2 strategic road network schemes in the UK, including the commencement of the first RIS2 smart motorway scheme, which supported sales of the UK temporary barrier fleet. Meanwhile, the UK security businesses benefitted from an easing of restrictions on public gatherings. The outlook for the Roads business in the US remains positive, according to the company. It invested in the expansion of its rental fleet during the period. Utilities – the division performed well, according to management, with particularly strong levels of demand for fire resistant utility poles, waterfront protection and mass transit infrastructure solutions, benefitting the US composite business. Galvanizing – the company reported a good performance in the UK and France. Labour shortages continued to limit production capacity in some US galvanizing plants, as previously reported. An increased focus on higher margin work is helping to mitigate the impact of this. We believe the group’s overall ability to pass on increased costs to customers is very strong and we are encouraged that management expects to deliver underlying operating profit in line with consensus, despite inflationary pressures. The company’s products are critical and a relatively small portion of customers’ overall spend, which helps in passing on increased costs. The group's preliminary results for the year ending 31 December 2021 are scheduled to be announced on 10 March 2022. Forecasts, valuation and recommendation We leave our forecasts unchanged but see scope for upgrades for FY22F and FY23F through value accretive M&A. We upgrade our DCF-based fair value to 1,700p (from 1,640p) on a slightly lower discount rate (8.2% cost of equity from 8.4%) given our increased confidence in the company meeting our forecasts and its ability to pass on price increases to customers. As of last night’s closing price, Hill & Smith trades on 24x our FY21F EPS forecast, falling to 22x and 21x for FY22F and FY23F. On an EV/EBITDA basis, it trades on 14x falling to 13x and 12x. We believe the company is well positioned to grow its high-margin galvanising business and increase sales into the US and UK highways markets. However, we believe its growth opportunities are fairly reflected in the current share price. We see Renew Holdings as a more attractive opportunity for investors seeking to capitalise on an expected increase in government spending on infrastructure. Tom Fraine - 0151 600 3723 / Akhil Patel – 0151 600 3719 tom.fraine@shorecap.co.uk / akhil.patel@shorecap.co.uk XPS PENSIONS^ (XPS, Buy at 146p) – Interim results in line Summary. XPS has published H1 2022 results for the period ended September, the message being broadly consistent with that delivered in the pre-close update on 14 October. Revenue growth has accelerated to 10% to £67.3m in H1 with strength across the Pensions business. At the pre-close update, XPS increased current-year revenue growth guidance to high-single-digit (from mid-single-digit). However, costs are also higher than anticipated in H1, +11% YoY, with adj. EBITDA +5% YoY to £15.5m. This means EBITDA margin of 23.0% in H1 is down on 23.9% in H1 2021. As such, XPS has confirmed current-year consensus expectations and we therefore do not anticipate making material changes to our profit forecasts though we’ll review after today’s 9.30 meeting. Interim DPS increased to 2.4p from 2.3p in the prior year. We do not expect the share price to respond materially either way following these results after a decent recent run. While revenue growth momentum has accelerated, the lack of drop through to the bottom line given cost inflation is underwhelming. There is no update on M&A however XPS remains on the look-out for acquisition opportunities. Maintain BUY. Revenue drivers. Client demand is being driven by the “sheer volume of regulatory change”. XPS has still only scratched the surface with GMP equalisation where revenue of £2.5m was generated in H1. The new business pipeline has recovered to pre-pandemic levels at c.£8m and has remained stable at that level since the end of H1. At the start of H2, XPS was appointed to be adviser to BT, which is a significant client win with the UK’s largest DB pension scheme. Cost drivers. Staff costs were +10% YoY in H1. This reflects some catch up after difficulties recruiting during the pandemic and build of capacity for future growth. However, competition for talent has also intensified across XPS’ industry. Other pockets of cost inflation include cyber security, data security, PI insurance and National Insurance. We are looking to hear more at the meeting about cost efficiency potential. Valuation and recommendation. At last night’s close price of 146p, the share price is not too away from a 2-year high. On our provisionally unchanged earnings forecasts, XPS trades on a P/E of 14.3x in the year ending March 2023F, falling to 13.3x in FY24F, and yields 4.7% in respect of FY23F rising to 5.1% in FY23F. We continue to think earnings predictability, high cash conversion and low capital intensity should appeal to income investors, maintaining a BUY on XPS. We will review our current 150p fair value in light of our model revisions shortly. Given inflationary concerns currently weighing on the market, XPS’ revenue visibility is one of its most attractive features in our view. Vivek Raja – 07816 361775, vivek.raja@shorecap.co.uk ORIGIN ENTERPRISES^(OGN, Buy at €3.23) – Q1 trading update; strong start to FY22F Origin Enterprises (‘Origin’) the provider for crop inputs, specialist agronomy advice and digital agricultural solutions to the Irish/UK, European and LATAM farming communities has today published its Q1 FY22F (August to October) trading update. We note the Group generates c90% of its operating profit in H2 given the planting cycle so Q1 tends to be seasonally quieter. Overall, Origin has made a strong start to FY22F which has been driven by favourable autumn/winter planting levels compared to the prior period (Q1 FY21A was adversely impacted by increased carry-over stock thereby reducing demand for Origin products). Financials: Reported Group Q1 revenue increased by 42.6% to €451.1m (+38.3% constant currency and +38.2% underlying). The improved performance was driven by an increase in overall demand levels as well as farmers forward purchasing and an encouraging autumn/winter UK planting season. We note the increase in global output prices (i.e. fertiliser and feed) represented c50% of the revenue growth in Q1. Total Agronomy and inputs (i.e. excluding crop marketing) accounts for c85% of total Group Q1 revenue and on an underlying basis increased by 44%,which reflects an underlying volume increase of 21.0% in sales of seed, crop protection and fertiliser during Q1. • UK/Ireland - underlying agronomy services and crop input volumes increased by 16.4% in Q1 FY22 as in-field conditions were favourable and recorded higher yields year-on-year (yoy). The expected area of oil seed rape is up 19.0% yoy to 0.4m hectares (ha), total autumn/winter planted area is expected to be 5.1% higher yoy at 2.5m ha and combined autumn/winter and spring plantings for the CY22 crop production year are expected to be 1.1% higher yoy at c4.3m ha. B2B Agri-Inputs has had a strong start to FY22F as demand for fertiliser (farmers forward purchasing given volatile prices and concerns around supply availability)and animal feed ingredients volumes increased yoy. Digital agricultural services now has 1.8m active ha (+28.6% yoy). • CE – underlying agronomy services and crop input volumes (ex crop marketing) volumes increased by 22.4% in Q1 FY22 driven by forward purchasing due to supply chain concerns/challenges. The autumn/winter planted area is expected to reduce marginally across our CE markets with Ukraine’s total autumn/winter plantings forecasted to be 7.4% behind yoy at 8.1m ha (winter plantings has reverted to a more normalised level) and combined autumn and spring plantings at 23.5m ha (marginally behind yoy). Poland autumn/winter plantings are forecasted to be broadly unchanged at 5.1ha (CY21 total cropping area for the growing season is expected to be at 8.8m ha) and Romania’s autumn/winter plantings are expected to be +6.1% yoy at 3.1m ha (combined winter and spring plantings for the growing season are currently anticipated to be +0.9% yoy at 8.4m ha). • LATAM – - underlying agronomy services and crop input volumes increased by 89.3% in Q1 FY22 driven by an increase in its core product range and a significant increase in controlled release fertiliser sales. Favourable weather conditions have resulted in soya plantings being ahead yoy with the total cropping area dedicated to soya is expected to increase by 4.4% yoy to 40.2m ha. Outlook & Forecasts: we note the planted area for the autumn/winter crops is expected to be broadly in line yoy (the UK is expected to offset a modest reduction in CE and with LATAM’s total cropping area dedicated to soya is expected to increase) and with strong global grain prices providing a positive/firm market backdrop as well as increasing farmer confidence. Management highlight that the favourable planting levels set a solid foundation for continued progress but note the ongoing operating and commercial challenges around global supply chain and commodity/raw material price volatility. However, the Group believe it is well placed to deal with those issues and is confident in the Group’s ability to grow in FY22F and beyond. As a result, we forecast FY22F adj. operating profit of €62.1m (+c12% yoy), adj. PBT of €54.1m (+c16% yoy) and adj dil EPS of 40.5p (+c15% yoy). Valuation & Recommendation: We believe Origin represents a long-term opportunity given it is a market leader/well-positioned across its end markets, has strong routes to market with long-standing customer relationships, solid cash generation characteristics and has good market consolidation opportunities in large, but fragmented markets. We believe that the shares will start to re-rate once trading conditions become more normalised, less dependent on weather conditions and with the product mix transition (to more higher margins activities/products). Origin currently trades on an FY22F PER of 8.0x, an EV/EBITDA of 4.5x and a dividend yield of 3.8%. We note the agricultural sector for a normalised year has an average PER of c13-15x, thus trading below at a discount we believe is unjustified. We retain our Buy recommendation. Akhil Patel – 0151 600 3719 / Clive Black – 0151 600 3701 akhil.patel@shorecap.co.uk / clive.black@shorecap.co.uk SECURE TRUST BANK^ (STB, Buy at 1,300p) - Small acquisition bolsters capability in BNPL + positive trading update Summary: Secure Trust Bank has announced a small acquisition that will bolster its capability in Buy Now Pay Later (‘BNPL’) ahead of a new digital product launch next year. In addition, the supportive economic backdrop means that the full year impairment charge is expected to be materially below consensus resulting in profitability above the top end of the current range. Acquisition bolsters capability in digital BNPL space: At the recent Capital Markets Day, management announced plans to launch a new BNPL (short-term, small-ticket) product in H1 2022, which will sit alongside its existing retail point-of-sale (longer-term, larger-ticket) offering and leverage its 1,400+ retailer relationships. Today, the group has announced the acquisition of AppToPay Ltd (‘AppToPay’), the owner of a proprietary app-based technology platform, that will support its planned entry into the digital BNPL market. No financial details have been provided, suggesting that the consideration will not materially impact the group’s financial position in the near-term. However, we believe that BNPL has the potential to be a significant product for the group in due course and that this will help it deliver on management’s target of achieving total loan book growth of 15%+ per annum over the medium-term. . AppToPay is already regulated by the Financial Conduct Authority (FCA), thus supporting its credibility as an acquisition target for Secure Trust Bank. Positive trading update: In addition to the acquisition of AppToPay, the group has also announced that it expects the full year impairment charge to be materially below the current consensus (£12.9m), resulting in pre-tax profitability above the top end of the current range (£52.6m). This reflects the favourable economic backdrop with both unemployment and house price inflation tracking better than the group’s previous expectations. Consequently, we have reduced our FY21F impairment charge forecast to £4.4m (from £17.3m) which drives an upgrade to our PBT forecast of 29% to £57.7m (from £44.8m) and results in EPS of 259p (previously 201p). We leave our forecasts for FY22F and FY23F unchanged at this stage. We also leave our dividend forecasts unchanged, which means the payout ratio is likely to be below the target c.25% level in FY21F, noting that an expected normalisation of impairment charges in FY22F will likely see earnings fall initially (and so the payout ratio increase) before resuming a growth trajectory thereafter. For further details of our forecasts please download our full trading comment. Valuation and recommendation: Following this update we increase our fair value to 2,000p (from 1,920p), reflecting forecast changes and roll-forward to use FY22F as the base year. BUY Gary Greenwood – 0151 600 3717 gary.greenwood@shorecap.co.uk For a list of Shore Capital disclaimers, please click here To discuss or change your research or communication preferences, please contact us Shore Capital Stockbrokers Ltd. is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange Shore Capital is a trading name for both Shore Capital Stockbrokers Limited FRN: 124784 and Shore Capital and Corporate Limited FRN 146629 Registered in England and Wales at Cassini House, 57 St James’s Street, London, SW1A 1LD. Registered No. 01850105. Member of the Shore Capital group ©2021 Shore Capital Stockbrokers Limited
STB OGN XPS HILS PREM BRSD MNZS MACF CLG MOTR
After Secure Trust Bank’s (STB) upbeat trading update in October, we feel there was a bullish tone to its capital markets day presentations on 3 November. This was underlined by the announcement of a new medium-term target for loan book CAGR of 15%+. Areas highlighted for greater focus and opportunity included: 1) growth of digital ‘buy now pay later’ (BNPL) and interest-free products in retail finance, 2) the growing presence of corporate landlords in the UK residential market and 3) new upcoming products in vehicle finance including in personal contract purchase (PCP). STB is seeing good loan demand in its key segments and appears well positioned to take advantage of this to grow its balance sheet and profitability.
In its Q3 trading update, Secure Trust Bank (STB) disclosed that it is experiencing robust loan growth. New business lending is now above pre-pandemic levels. STB’s core lending book in Q321 rose 3.3% quarter-on-quarter and 7% year-on-year. Motor finance new business grew 15% in just three months. New business lending in the quarter was up 20% and 59% on the previous quarter and 12 months ago. Net loan balances were £2,404m in Q321, which is in line with our end-FY21 forecast of £2,400m. We therefore believe that if STB maintains this growth pace, its loan book is likely to come in 3–5% above our year-end forecasts. Although there was no formal statement on either asset quality or interest margins, management stated that the bank is trading in line with its guidance from the July update. STB will have a capital markets day for analysts and institutional investors on 3 November 2021.
Strengthening momentum Secure Trust Bank (STB) has reported strong new business volumes for 3Q21 which have informed 3.3% growth in net lending balances in the period. Whilst trading is stated to be in line with prior guidance, we perceive upgrade potential if current trends continue and reiterate our view that the valuation is too low for a business with such significant opportunities. Our target price of 1,587p is 38% above the share price and we recommend STB as a Buy. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Secure Trust Bank (STB) reported H121 PBT of £30.7m, boosted by a net impairments reversion of £1.1m (vs a net charge of £19.8m in H220). The good news on provisions had been previously flagged by management. Loan arrears have remained lower than expected and most borrowers have returned from payment holidays. Loan demand is picking up and loans grew 1.3% (core division loan growth of 2.6%) in the six months to 30 June 2021. STB also announced a new 25% payout dividend policy along with a surprise 20p interim dividend. This policy better matches the bank’s growth strategy of organic and opportunistic acquisitions. We have raised our FY21 earnings forecasts to reflect lower impairments while trimming FY22 EPS by 11% (ROE forecast 9.5%) to reflect higher costs as the bank expands. Our fair value has edged to 2,234p from 2,163p per share.
Accelerating growth 1H21 results of Secure Trust Bank (STB) significantly exceeded consensus estimates as a net provisions release concealed higher than expected costs. High growth potential remains, however, and the improved operating environment leads us to retain our Buy recommendation with a TP of 1,587p (from 1,592p). Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 9-page note
Secure Trust Bank’s recent results for the half year to 30 June 2021 showed a record interim profit performance, with much better than expected impairments (small net release) more than offsetting higher than expected costs (largely volume related). As a result, management reiterated guidance from its recent (12 July) trading statement that full year PBT is now expected to be above the top end of the consensus range (£36.8m). Consequently, we have upgraded our FY21F PBT to £44.8m (from £26.4m). In addition, management has set a new dividend policy which targets a payout ratio of 25% in order to allow the group to retain enough capital to fund future profitable loan book growth without external help. While this makes sense from a capital allocation and value creation perspective, it does see us materially reduce our dividend forecasts for FY22 and FY23. Overall, we remain very positive on the prospects for Secure Trust Bank with its loan book now showing encouraging signs of recovery. We reiterate our positive stance based on an upgraded fair value of 1,920p (previously 1,700p).
1H21: provisions release drives strong earnings beat Momentum is returning to STB in terms of lending volumes, whilst credit trends are favourable. Although costs are ahead of our expectations, FY21 profit forecasts will rise and we believe the shares afford good value trading at a 10% discount to TNAV. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Secure Trust Bank (STB) announced on 23 July it has agreed the sale of its entire residential mortgage loan book to Jacqali Designated Activity Company, a financing vehicle created in 2021 by an undisclosed global financial institution. STB estimates the sale price at £54.6m and above net book value. Mortgages represent 2% of loan book so the sale is not needle moving – we estimate 10–20bp might be added to our FY21 forecast tier 1 capital ratio of 13.6%. STB stopped writing new business before the pandemic started in 2020, viewing market conditions as creating unattractive risk adjusted margins in this segment. This sale simplifies the group structure and draws a line under STB’s exit from the business. The capital will be reallocated to STB’s remaining business and general corporate businesses. We forecast STB’s loan growth to be 5.1% in FY21 and for it to increase to 15.3% in FY22.
Focusing on the core business Secure Trust Bank (STB) has announced the sale of its remaining mortgage loans, strengthening the group’s focus on its more attractive continuing core business. The deal appears sensible and we retain our Buy recommendation and 1,592p TP. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Secure Trust Bank (STB) issued an upbeat pre-close interims update, noting that positive trends in Q1, particularly regarding asset quality, have continued into Q221. The recovery in loan impairments underpins STB’s board now expecting FY21e PBT to be ‘materially’ ahead of company collected consensus of £29.5m (Edison forecast £27.4m) and above the top end of the range at £36.8m. STB disclosed that the board ‘remains cautious on the near to medium term UK economic outlook and will maintain a prudent provisioning policy, in case economic conditions worsen in the second half’. STB will report its interims on 5 August 2021 and we are likely to review our forecasts following the results. The adjustment in impairments is likely to be lower in FY22 than in FY21, with STB guidance along similar lines in its statement.
Trading materially ahead of consensus to date in 2021 Secure Trust Bank (STB) has reported that lower credit losses should result in FY21 PBT materially ahead of consensus. We upgrade our adjusted EPS estimates by 31%, 8% and 5% for 2021E, 2022E and 2023E, respectively. Our target price rises 11% to 1,592p and we retain our Buy recommendation. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 2-page note
Secure Trust Bank (STB) announced in its Q120 trading update that new business lending rose 7.1% year-on-year and 2.4% quarter-on-quarter to £318.5m. Loan balances declined by 6.6% and 1.0% respectively, with lending still affected by the COVID pandemic lockdown. The loan balances of the Business Finance and Consumer Finance divisions were ‘static’, but the run-off of the closed Asset Finance and Consumer Mortgage books led to the 1% decline. Management viewed credit performance as ‘benign’. STB is seeing a phased return to pre-pandemic lending criteria in the Motor Finance division. We continue to forecast a 5% year-on-year increase in group loans by the end of FY21. Client deposits fell 8.2% year-on-year and 3.8% quarter-on-quarter in Q121, but STB said it was able to further reduce its cost of funding.
1Q21 update: improving momentum Secure Trust Bank (STB) released a trading update for 1Q21 consistent with prior guidance and highlighting signs of gathering momentum as the UK emerges from lockdown. New lending volumes are rising, whilst credit trends remain benign. STB trades at c.0.8x TNAV and there is >20% upside to our TP of 1,430p. We retain our Buy recommendation Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Secure Trust Bank (STB) reported FY20 PBT of £20.1m versus our estimate of £13m. The beat was mostly driven by lower than expected impairments (2.3% vs 2.7%). PBT was about 50% down on FY19, but the ROE of 6.2% shows resilience given the pandemic. STB’s Q3 update and pre-close statement had already indicated that asset quality was better than expected and business volumes were holding up relatively well. The latest lockdown is affecting H121, but we estimate loan growth of 5% and 15% for FY21 and FY22. We see impairment dropping to 1.5% by 2022, which should help drive ROE to 11.1%. The share price has rebounded but STB still trades on an FY21 P/BV of 0.79x, despite a strong track record of value creating returns (ROE above COE). Its solid good capital base (CET1 14.2) supports management’s strategy of seeking growth opportunities both organically and through possible M&A. We have increased our fair value to 2,163p/share (from 1,756p) mainly due to rolling forward one year.
Upgrade to Buy Secure Trust Bank (STB) weathered challenging economic conditions better than expected in 2020, maintaining stable revenues and reporting impairment charges significantly below consensus estimates. We increase our 2021E EPS by 65% and 2022E by 7%, and raise our TP 40% to 1,430p. With c.23% upside to our TP, we upgrade from Hold to Buy. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 9-page note
Secure Trust Bank, the specialist provider of consumer and business finance, published (25th March) better than expected full year results to 31st December 2020. We had recently upgraded our forecasts following a bullish trading update in January, yet profitability still came in materially ahead of our revised expectation, with lower impairment charges being the key driver of the outperformance. In addition, the group reported a better than expected core tier 1 ratio which, combined with a profitable performance for the year as a whole, gave management the confidence to resume dividend payments having previously withheld the 2019 final and 2020 interim. The new management team also set out a number of new medium-term financial targets, the most notable of which was an ambition to deliver a 14-16% return on equity, which we forecast to be achieved by FY23. This needs to be seen in the context of a share price currently trading at a c20% discount to its last reported book value of 1,452p, suggesting material upside potential is on offer through delivery. Following this update, we leave our FY21 and FY22 earnings forecast broadly unchanged but increase our fair value to 1,700p (from 1,400p) as we roll-forward a year, bringing higher FY23 earnings into sight. BUY
FY20 results stronger than expected Secure Trust Bank (STB) proved more resilient than expected in 2020. Loan balances have now stabilised, whilst credit quality is proving resilient and the capital position has strengthened. STB provides lowly valued gearing to the UK economic recovery. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Secure Trust Bank’s (STB) pre-close update confirms the upbeat trends evident in its Q3 update in November. The strong lending rebound continued into Q4, loan repayment holidays are at low levels, and the balance sheet has remained robust and liquid. STB reiterated that its FY20 PBT would be well ahead of £9.7m (we forecast £13.0m). However, the new COVID-19 restrictions introduced in December 2020 have affected consumer loan demand into 2021, as well as the Motor Finance business. Management expects to be better placed to disclose its outlook for FY21 when STB’s FY20 results are released on 25 March. Our forecasts (FY21 PBT £31.6m, ROE 9.1%) and fair value (1,756p per share) remain unchanged.
Pre close trading update: strong Q4, uncertain outlook Secure Trust Bank has traded better than expected in 4Q20 and we raise our FY20 PBT estimate by 90%. Significant uncertainties remain for future periods although the shares are lowly rated (0.7x TNAV) relative to the profitability potential of the group (low double-digit RoTE). We remain at Hold and raise our target price by 2% from 799p to 815p. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
This morning, Secure Trust Bank published a pre-close trading update covering the year to 31st December 2020. The group had recently (5th January 2021) indicated that it expected FY2020F results to be ahead of the prevailing consensus for statutory PBT of £7.6m (range £5.6m-£9.7m), but has now clarified this to state that it expects performance to be “materially ahead of the upper end of consensus profit before tax”. Consequently, we have upgraded our full year statutory PBT forecast to £12.7m (from £6.7m), which equates to adjusted PBT of £13.2m (adjusted EPS of 57.9p). We expect this to be trough earnings in the current cycle and see good recovery potential thereafter. As such, we remain comfortable with our 1,400p fair value (equivalent to c1x TNAV per share) and BUY recommendation.
Paul Lynam, Secure Trust Bank’s (STB’s) CEO, is stepping down to become Equiniti Group’s CEO. David McCreadie, who joined STB as a non-exec board member a year ago, will replace him. McCreadie is a banker with 30 years of experience at RBS, Kroger Personal Finance and Tesco Bank. The transition should be seamless, with the growth strategy (organic expansion and M&A opportunities) expected to remain the same. Lynam leaves the bank with a well-capitalised balance sheet (we forecast 13.9% CET1 for FY20), resilient business, a good franchise and well positioned to react when the economy improves. STB will make its pre-close trading update on 21 January, but has reiterated its October 2020 statement that it is trading ahead of consensus FY20 PBT of £7.3m.
Secure Trust Bank’s (STB) Q3 trading update disclosed that Q3 was stronger than expected and FY20 earnings are likely to be well ahead of consensus forecasts. Loan repayment holidays in its Motor Finance and Retail Finance divisions were down remarkably and credit quality is not deteriorating. Loan demand is strengthening after the lockdown. Capital and liquidity remain good. The bank remains cautious due to continued COVID-19 and Brexit uncertainty and is still not providing formal guidance. We are upping our earnings forecasts and fair value from 1,704p to 1,756p. In our view, the valuation remains depressed compared to fundamentals with banking stocks still out of favour. STB trades on an FY20 P/BV of 0.53x, yet it has a strong track record of value creating returns (ROE above COE), a good capital base and liquidity. The Q3 good news reinforces our view that we are unlikely to see book value deterioration during this downturn to justify any NAV discount.
Secure Trust Bank (STB) reported H120 PBT of £5.1m (vs £18.1m a year ago) and a 3.0% ROE. Income grew 4% y-o-y, but impairments almost doubled, and payment holiday charges also hurt. STB notes that since the lockdown ended, business has been rebounding. Its robust capital (CET 13.5%), business model and proven agility allow it to react to the changing lending environment. STB currently trades on a P/BV of 0.49x, reflecting sentiment more than fundamentals given its profitability track record and successful model. Our fair value estimate is 1,704p per share, down from 2,428p..
When we published updated forecasts in May to reflect the impact of Covid, we had assumed that a contraction in the loan book, combined with a sharp increase in impairments, would result in a full year loss for Secure Trust Bank. While these trends were evident in the first half performance, a profitable outcome was still achieved. This was somewhat better than we had expected, with both the pace of loan book contraction and the size of impairments positively surprising. Although the UK economic outlook remains uncertain and it is unclear what the full impact of the removal of government support measures will be, there are encouraging signs that demand for lending is increasing again. With a strengthened capital position and a well-funded balance sheet, we believe that Secure Trust Bank is well-positioned to take advantage of any future growth opportunities, albeit we expect management to remain cautious near-term. The current P/TNAV of just 0.5x appears very undemanding for a bank that we view to have a resilient balance sheet, and which retains good medium-term growth potential. BUY
Following an unavoidable delay, Secure Trust finally published results for the year to 31st December 2019 on 7th May. While these showed a good outcome for the year, with doubledigit profit growth recorded, they provide us with little more than historical context given the significant change in the operating outlook caused by the onset of the COVID-19 crisis. Although the first two months of the new financial year were tracking slightly ahead of budget, performance has since deteriorated as demand for consumer credit has evaporated. As such, management is hunkering down with a focus on protecting the balance sheet and conserving capital so that it is ready to switch the lending taps on again when conditions eventually improve. While this means near-term profitability will be severely dented, we expect a sharp recovery thereafter, with a close to mid-teens return on tangible equity anticipated by 2022F. On this basis, we think the shares should be valued at least in line with their trough TNAVPS of c1200p. BUY
Secure Trust Bank’s (STB) FY19 figures were good, as already flagged in its trading update. Underlying ROE was 14.0% (FY18: 12.8%), EPS was up 10% y o y and capital remained comfortable (CET1 12.7%). However, the COVID-19 pandemic has led to a significant drop in business activity and impairments are expected to increase. STB has suspended forward guidance since March due to uncertainty relating to the pandemic and subsequent economic recovery. Its relatively short duration loan book, already cautious lending stance and good capital position should help. Financial markets turmoil has the bank trading on a 2019 P/BV of 0.65x despite a track record of delivering value creating ROE above its COE.
Secure Trust Bank (STB) is delaying the release of its FY19 results, due on 26 March, as requested by the FCA on account of COVID-19. It was aiming for double-digit earnings growth in 2020 and stated that its first two months of trading was strong and ahead of management expectations. COVID-19 uncertainty has nevertheless prompted STB to cancel its forward guidance and final 2019 dividend payment. We are maintaining our FY19 forecasts as the pre-close statement indicated that results would be in line with expectations. However, we are suspending our 2020â21 forecasts until there is more clarity on the impact of COVID-19. Our DDM fair value of 2,428p per share is equivalent to a P/NAV of 1.8x in 2019. This valuation reflected assumptions that STB would deliver returns considerably above its 10% cost of equity (COE) in the medium and long term.
Secure Trust Bank’s (STB) pre-close trading update indicates that FY19 results should be in line with expectations, despite the economic slowdown dampening loan demand in the second half of 2019. STB highlighted its strong control over risk while interest margins have been stable. The bank is cautiously optimistic about 2020 and is well positioned, with healthy capital, good liquidity and new business pipelines. STB does not envisage material changes to 2020 guidance, and we are maintaining our estimates and 2,428p per share valuation.
Secure Trust Bank has issued a scheduled full year pre-close trading update covering the year to 31st December 2019, having last updated the market on 16th October when management highlighted that it had seen a general slowing in demand in September. While demand for consumer and house building finance (combined, approximately two thirds of the group’s loan book exposure) was also dampened over the final quarter of the year, the group continued to grow its loan book and revenue base while maintaining price discipline and credit quality. As a result, management expects full year results to be in line with its own and market expectations, which we regard as a good outcome against potentially sceptical market expectations. We leave our forecasts and 2400p fair value unchanged. BUY
Secure Trust Bank’s (STB’s) trading update for Q319 had a reassuring tone. The business trends and ‘overall results are in line with management expectations’. Management noted that demand slowed in September, but this is not a surprise given Brexit deadline concerns. STB has been in de-risking mode for several quarters and has been repositioning its loan book in anticipation of economic and political uncertainties. At the same time, the short duration of its loan book allows it to respond quickly as the lending environment changes. We are not making changes to forecasts or our fair value of 2,428p per share.
Secure Trust Bank (‘STB’) published (7th August) a good set of interim results for the half year to 30th June 2019, with overall performance in line with expectations. The group continues to deliver strong loan book growth reflecting the benefit of its relatively small size and diverse product offering. In addition, we highlight that STB has one of the shortest duration loan books of all UK banks meaning that it is relatively well positioned to adapt to any changes in the macroeconomic outlook. The group continues to invest in developing its product offering, with the launch of V12 Vehicle Finance and a new cash ISA during the period. It also remains on the look-out for potential inorganic growth opportunities. We reiterate our positive stance with an updated fair value of 2,400p. BUY
Secure Trust Bank (STB) reported H119 adjusted pre-tax earnings up 14% y o y driven by volume growth and lower impairment rates. With a diversified lending model it has shown the ability to shift asset allocation significantly, de-risking and avoiding price pressures prevailing in some lending asset classes. By putting the brakes on early, STB is now reaping the rewards, with good profitability and the flexibility to adjust to macro and political changes.
Secure Trust Bank’s (STB) trading update seems to vindicate its decision to step away from mortgages for now and focus on segments where the risk-reward pricing is more attractive. The retail and motor finance segments (both with net revenue margins above 10%) have been doing well and earnings are slightly ahead of management expectations in the first four months of this year. We are not changing our forecasts, but may revise them if interims in July confirm the good news.
Secure Trust Bank (‘STB’) published (28th March) full year results to 31st December 2018 that came in comfortably ahead of our expectations despite the group issuing an ‘in-line’ trading statement in January. The results themselves demonstrated the impact of the recent strategic repositioning which has seen the group move away from riskier consumer and sub-prime lending activities. This has manifested itself in lower margins which were broadly offset by an improvement in the impairment ratio, thus allowing strong underlying loan book growth to reconnect with profit growth despite increased investment in the cost base. As a result, returns improved for the first time since 2013, a trend we expect to continue given anticipated profit growth and a further reduction in capital ratios due to strong loan book growth. With an updated fair value of 2,325p (previously 2,500p), even on downgraded estimates, we reiterate our positive stance. BUY
The FY18 results provide evidence that Secure Trust Bank’s (STB’s) strategy of combining de-risking and selective growth is working. Adjusted EPS rose 39% y-o-y while loan growth was a robust 27%; ROE increased from 8.9% to 13.1%. STB targets further strong growth in 2019 and is investing in areas such as a new motor finance platform, treasury and risk management to underpin this. STB has entered 2019 with good momentum, healthy capital and proven flexibility to adapt to opportunities and challenges that may occur in the macro and political environment.
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Secure Trust Bank’s (STB’s) pre-close trading update was encouraging, indicating it expects to deliver results in line with management’s and the market’s expectations. The bank has proposed a stop on new mortgage origination, unhappy with current price pressure and loan to value metrics, but does not expect this to have a material impact on 2018 and 2019 numbers. The bank sees itself entering 2019 with positive business momentum and robust capital and is well placed to continue its selected growth strategy despite the current political uncertainty.
STB’s Q318 trading update was upbeat. There are signs that the repositioning strategy is working, trading conditions are robust and it is on track to deliver guided earnings. The Tier 2 capital issue during the period added 268bp to capital, further positioning STB for future growth. Our estimates are unchanged (EPS growth 32% FY18). The shares now trade at PNAV of 1.2x, which compares favourably with our forecast ROTE.
H118 results show Secure Trust Bank (STB) is making good progress in shifting its loan mix into lower risk segments and where pricing is more attractive. Despite being in a transition phase, STB delivered strong momentum in loans (22% YoY) and PBT (+38%). Concerns regarding these asset mix changes and the transition drag on earnings have probably contributed to recent share price weakness and the current valuation suggests there is room for rerating as STB continues to deliver successfully on its strategy.
FY17 was a further year of change for Secure Trust Bank (STB) as management completed the shift away from unsecured consumer loans and reduced the risk profile in motor finance. This restricted near-term profits but the pace of loan book growth has remained strong and looks set to feed into substantial earnings growth as the cost of risk subsides, more than offsetting the lower returns earned on lower risk lending. The shares have begun to respond to this prospect following the results, but the valuation suggests further upside.
Secure Trust Bank (STB) remains on track with both its shift towards a lower risk loan book and near-term trading. The move to lower risk assets has trimmed returns, but loan book growth continues apace and the benefits in terms of revenue and impairments should become clear in FY18 and FY19, years in which we expect earnings growth of over 30%.
Secure Trust Bank’s (STB) first half results were a reminder that the reshaping of the loan book towards one with a lower risk profile does involve some pain. While lower asset yields from new business and maintained impairments from the back book pinch near-term returns, the potential growth of over 30% in FY18 and FY19 earnings is an indicator of gains to come on the back of a higher-quality, more diverse and resilient loan book.
Secure Trust Bank (STB) reported results that were close to expectations for 2016, a year that saw major changes as the group generated substantial profit from the Everyday Loans Group sale, gained independence and moved to the Main Market. At the same time there was substantial growth in the loan book contributing to underlying EPS growth of 20%. Looking ahead, there is scope for further organic growth but STB will also consider acquisitions on a disciplined basis. Both have the potential to contribute to a strengthening in the return on equity from the 2016 level of 11.9%, towards the return on required equity of nearly 20%.
The Q4 trading update confirmed the business has been performing in line with management expectations and the full-year results should meet market expectations. Secure Trust Bank’s (STB’s) prudent approach was reflected in the announcement of greater caution in its consumer business including suspension of new unsecured personal lending. We have tempered our estimates for FY17 and FY18 but our updated valuation still shows a c 16% premium to the share price.
Now independent with significant capital headroom, Secure Trust Bank (STB) is seeking a Main Market listing. This will leave it particularly well placed to take opportunities for both organic and inorganic growth in what may be a period of elevated uncertainty as the UK negotiates its exit from the EU. In its interim results STB showed strong growth, despite taking a more cautious stance in areas of its business before the EU referendum.
Shareholders in Arbuthnot Banking Group (ARBB) have approved the sale of shares in Secure Trust Bank (STB) that will leave the former parent as a sub-20% shareholder in the group. STB already has significant capital headroom to accommodate strong organic loan growth following the sale of Everyday Loans Group. Its plan to seek a Main Market listing will enable it to appeal to a broader investor audience, leaving it better placed to consider share issuance, providing greater flexibility to pursue a wider range of strategic options. This comes at a time of rapid growth and proliferation of contenders among specialist lenders and challenger banks.
Secure Trust Bank is an established ‘challenger’ with a record of organic profitable growth. The Everyday Loans Group sale provides substantial regulatory capital for organic and potentially inorganic growth. The move into mortgages will further diversify lending. Despite a record of rapid loan book expansion, an ROE/COE valuation model suggests the market is reluctant to make full allowance for profitable employment of the surplus.
STB continues to deliver excellent growth, as promised. In H115, 40% growth in statutory pre-tax profits was driven by a 42% revenue increase and smaller cost growth. Loans grew 90% on H114 and deposits by 75%. Impairments remain below management expectations. Strategically, H115 saw the initial payback for investment in the SME business lines. The real estate potential is being realised and is the key driver to SME lending now at c £25m per month (ie + 2% per month growth on H1 closing balance).
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