Buy motoring S&U

The group has been around since 1938, and is still run and majority owned by the Coombs family. And while bigger lenders were happy to spread money about like confetti before the credit crunch, S&U has consistently applied a more prudent business model that has clearly paid off.

The initial core business provides relatively small loans collected through a force of 500 agents across the UK. It's called Loansathome4u and, as the name suggests, the special ingredient is the close relationship between the agent and the clients. What's more, agents earn commission on repayments, not on loans arranged, so there is no incentive to encourage borrowers to get out of their depth.

More recently, however, the home loan business has been overtaken by Advantage, the motor finance division. Set up in 1999, this side of the business now accounts for more than half of group profits and in the year to January profits were up by 37 per cent to £8.1m, the 13th successive year that profits have risen to a record level. You can also add to this that collection quality is currently running at a record high, boosted by the fact that customer numbers continue to rise but also because credit quality remains good.

There are two reasons that explain S&U's success. The first is simple. Low staff turnover within the group means that the management team has a high degree of experience, enabling it to be choosy who the group lends money to. In fact, Advantage's underwriters currently filter around 500 transactions per month from over 17,000 applications, and impairment levels are at their lowest for more than five years. The second reason stems from the fact than loan quality is gradually shifting nearer and nearer to prime quality status because more and more people are being turned away by high-street lenders on the flimsiest of excuses, simply as a means of reducing the size of their loan books. Management remains pretty upbeat about expanding Advantage further, and plans to repeat last year's £5m investment again this year.

Even S&U is not impervious to the creeping effects of economic stagnation, although this has only really been felt on the home credit side. Restrained customer confidence and a squeeze on disposable income left Loansathome4u advances down 3 per cent in the first quarter of the current financial year and collections off 2 per cent, albeit both against a strong first quarter the year before. It is also becoming harder to find potential customers who can meet the group's strict lending criteria and, to counter this, management has decided to enhance the product mix on offer to existing customers. To this end, new products recently introduced include a pre-paid debit card, while other products are being designed to appeal to the more affluent sector where potential borrowers have become disillusioned with remote finance generally.

Credit quality obviously helps to boost cash flow, and the group's balance sheet remains in good condition. In fact, group gearing at the financial year-end was 33.7 per cent, its lowest level for a decade. The group's banking partners also seem happy, and recently allowed an increase in medium-term lending facilities as well as an extension out to 2018.