S&U’s year-end update confirms strong growth has continued at the main motor finance business with customer numbers up 26%, while credit criteria have been tightened to underpin the quality of receivables prospectively. Confidence in the property bridging business is growing, although it remains at a trial stage. Overall trading is in line with management expectations and our estimates are unchanged.
Advantage motor finance customer numbers stand at c 54,000, up 26% compared with end-FY17, while the 24,500 new transactions completed during FY18 represented an increase of 22% on the prior year. Advantage has continued to implement tighter criteria, which has resulted in an increase in the credit scores of new customers. This will take time to be fully reflected in the overall impairment rate but should more evident in FY19 and beyond. Helping to bolster customer numbers is Dealflo, an e-signature system that guides customers through terms and conditions and verifies their digital sign-off. This is contributing to a higher rate of conversion from approvals to transactions (c 10% in recent years). While new car registrations in the UK have shown distinct weakness (down 14% in 2017), used car sales have been much more resilient (see overleaf) and S&U suggests lower new car sales could support used car values as more people opt for used versus new.
The Aspen property bridging business has continued to build its loan book, with over £10m of loans issued. The business remains a pilot but confidence in the viability of the operation is increasing. FY19 sees the introduction of IFRS 9 and S&U has given an initial indication of potential impact of the accounting change on group numbers. IFRS 9 is designed to bring forward provisioning for bad loans where appropriate through the application of an expected loss model for certain loans. The net effect (allowing for deferred tax) could be a c £3m reduction in the level of opening receivables (and shareholders’ equity), taking the centre of the range indicated (0.5%-2.5% of receivables). There will be no change in cash flows and the impact is modest relative to overall equity (£143m at end-H118).
Our unchanged valuation of 2,700p is based on consideration of an ROE/COE model and peer group valuations. This suggests upside of over 20% from the current share price. On our estimates, the yield for FY18 is 4.8%.