S&U’s year-end trading update signalled that FY20 results are set to be in line with management expectations. It is encouraging that there has been a post-election improvement in transactions at both Advantage and Aspen, while used-car prices have stabilised or increased recently. Our estimates are unchanged and the shares trade on a sub-10x P/E and yield of 5%.
In addition to indicating ‘in-line’ expected FY20 results in March, S&U reported that Advantage motor finance ended the year with net receivables of c £280m (+8% vs FY19) and new transactions of 23,300 (+11%), both similar to our estimate. Nothing was added to the December comment on risk-adjusted yield (25.2%) so this is likely to have been similar at the year end, with further benefits of the tightening of credit criteria likely to flow through this year. At Aspen property bridging, repayments have improved, with £15m received in Q420. This contributed to a reduction in gross debt from £132m in December to £118m at year end leaving significant headroom for growth at both Advantage and Aspen. The second interim dividend is increased to 36p (35p) giving a total to date of 70p (+4.5%).
As we show overleaf, UK consumer confidence improved following the general election while unemployment remains at historically low levels. The rate of redundancies did increase during 2019 but remains subdued and has stabilised in the more recent readings (to November). These trends are broadly supportive for Advantage and taken together with the relative resilience of the used car market (9M19 sales down less than 1%) are supportive of the group’s expectation of another record result in FY21 for Advantage. The improved level of repayments at Aspen is likely to result in a lower year-end loan book than we had assumed (we estimate c £20m vs £28m); while this makes our estimated average FY21 lending and revenue levels more ambitious, the earnings impact of a shortfall is unlikely to be material. Stronger collections have increased confidence in the prospects for the business and we expect further investment (on appropriate criteria) to expand the loan book to a more material size over several years.
S&U trades on P/E and price to book multiples at a modest premium to its peer group average (see page 3) but earns a higher ROE and offers an FY20e yield of over 5%.