S&U’s update indicates trading has remained in line with management expectations but there are some slightly more cautious elements compared with our forecast assumptions at the time of the H120 results. As a result, we have modestly tempered our estimates for FY20/21. Even so, the shares trade prospective earnings multiples of below 9x while the yield is over 5%.
Motor finance receivables Advantage Finance have grown by 2% since the end of H120 (July), still positive but at a slower pace than in the first half (+5.8%). Customer numbers are also up 2% to a record 63,500. The risk-adjusted yield (revenue yield less impairment provision) has improved to 25.2% versus the July level of 24.9% (a rolling 12-month figure as reported by S&U) but this is a smaller improvement than anticipated by the company. This arises from higher than expected impairments from loans made in the period prior to a tightening of credit criteria and lower used car auction prices for recovered vehicles (see BCA auction data overleaf). S&U also notes that in addition to the continuous process of refining the underwriting system, integration of systems with broker partners has improved and the Advantage website has seen significant enhancements. At Aspen the loan book has increased from £24.7m at end-July to £28m. The group cites the continuing impact of political uncertainty in the property market as slowing borrower exits (in line with H1 commentary).
A number of indicators have shown some softening including used car prices (as noted), used car transactions, consumer confidence and the incidence of redundancies but the changes are small or very small and the value/volume of used car finance is up for 9M19. Advantage has a track record of managing through market cycles so although it is not immune to economic trends, we would expect it to be resilient to adverse developments. Positively, if the general election were to provide greater certainty, this could be a positive influence on confidence and the environment for both Advantage and Aspen.
Our EPS estimates are reduced by nearly 4% for FY20 and FY21 reflecting slightly more conservative risk-adjusted yield and receivables growth assumptions for Advantage. S&U still trades on lower prospective P/Es than the peer group and offers a higher yield than our peer group average.