S&U’s latest trading update confirms the improving trend in the motor finance business in terms of demand, transactions and indicators for credit quality. Aspen property bridging also continues to make progress although at a slightly slower rate. Our estimates are unchanged and the shares appear conservatively valued with an attractive yield.
S&U’s update for the period between its AGM (23 May) and end-July is reassuring. It indicates that the rate of growth in both loan applications and transactions continues to grow in the Advantage Finance motor finance business. Customer numbers are over 62,000 compared with over 60,000 at the time of the AGM and up 7% y-o-y. The used car market is described as robust and is expected to remain so even in the event of a no-deal Brexit. We view the confidence here as partly reflecting the segment of the market S&U addresses with loans averaging around £6,000 for vehicles that typically provide a means of getting to work. Similarly, its exposure to weakening car prices is substantially smaller than for personal contract plan lenders financing new or near-new cars. On credit quality, the early indicators on repayments of recently granted loans continue to show improvement following tightening of loan criteria. The Aspen property bridging business is also making progress but at a slightly slower pace than expected given a softening of activity in the housing market. Amounts receivable stood at £24m at end-July vs £22m at the time of the May update. Product and IT linkage improvements with introducers are expected to help in H2.
Used car market volumes have been more resilient than new car registrations recently and the value of car finance has continued to see growth. While the political/economic outlook appears uncertain, the profile and long-term track record of the Advantage business in particular are supportive features in the event of unfavourable macro developments. In the meantime, overall S&U trading is on track and our estimates are unchanged.
Our unchanged estimates point to S&U generating returns on equity of over 17% prospectively while a ROE/COE model suggests that, at the current share price, the market is cautiously factoring in a return of c 13%. Prospective P/E multiples are similar to a peer group (see page 3) but the yield is above average.