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Paragon maintains momentum

Buy-to-let lending is booming, and Paragon has also built up a useful and diverse revenue stream.
February 5, 2015

There may be a lull in housing activity ahead of the general election, but buy-to-let lending to professional landlords is still going from strength to strength. The Paragon Group (PAG) is one of the key suppliers of such finance, and in the three months to January this year buy-to-let completions at Paragon rose 58.4 per cent from a year earlier to £222m. And there is no sign of demand drying up because the pipeline of loans at the end of December stood at £417m; that’s nearly double the amount from a year earlier.

IC TIP: Buy at 419p
Tip style
Growth
Risk rating
Low
Timescale
Long Term
Bull points
  • Buy-to-let completions up sharply
  • Very low delinquency rates
  • Distressed loan book outperforming expectations
  • Strong cash generation
Bear points
  • Sensitive to interest rate rises
  • Relatively modest dividend payout

Credit quality remains impressive, too. Arrears on the buy-to-let portfolio stood at just 22 basis points at the end of December, down from 25 in September, while redemptions fell over the same period from £107m to £97m. Paragon caters mostly for well-established professional landlords, typically with a dozen or more properties. There is considerable security here because in cases where arrears start to grow, the group has recourse to using a property's rental income to meet repayments. And where this is not possible, the property can be sold to redeem the mortgage, which is usually not more than around 70 per cent of the property value.

 

 

One of the strengths of the Paragon business model is the diversity of income streams. This reflects the group's success in addressing the adverse conditions that accompanied the financial crash, a time when the share price collapsed from over 1,000p to just 31p. The problem then was that, as well as a complete freeze in the wholesale finance market, there was also a total moratorium on securitisation. Prior to the crash, Paragon would bundle up a parcel of buy-to-let mortgages and use them as collateral to issue bonds. These were consequently removed from the balance sheet, leaving the group's "warehouse facility" with banks replenished and available to make further loans.

While the crash left Paragon ticking over, it was at this time that plans were hatched to reduce the reliance on mortgage lending. Since then, it has moved into car finance, buying up distressed debt from banks anxious to reduce their debt portfolios, and has also opened its own deposit-taking bank, a useful source of finance which reduces its reliance on the wholesale money market.

THE PARAGON GROUP OF COMPANIES (PAG)
ORD PRICE:419pMARKET VALUE:£1.28bn
TOUCH:419-420p12-MONTH HIGH:432pLOW: 314p
FORWARD DIVIDEND YIELD:3.1%FORWARD PE RATIO:10
NET ASSET VALUE:310p  

Year to 30 SepPre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20129423.26
201310425.57.2
201412230.59
2015*13735.610.8
2016*15441.013
% change+12+15+20

Normal market size: 5,000

Matched bargain trading

Beta:0.96

*Shore Capital forecasts, adjusted PTP and EPS figures

Buying up packages of distressed debt has really taken off. Under the group's operating arm, Idem Capital, net investments last year nearly doubled to £175m, taking outstanding balances up to £427m. These debts are purchased at significant discounts to face value, a useful buffer against the inevitable batch of non-performing loans. Cash performance remains strong though, and Idem contributed £48m to group underlying profits last year, up from £35m a year earlier.

Paragon's own bank is the latest addition to the business model, receiving formal authorisation in February last year. The bank concentrates on three revenue streams; car finance, personal finance and buy-to-let. And last summer, it launched its own internet-only savings product. Overall progress here has been encouraging, with £94m of deposits taken by the end of 2014. The bank also offers easy access one, two and three year bonds, as well as 40 and 120 day notice deposit accounts. Inevitably, starting up a new business line involves significant capital investment, and the group injected an additional £36m of capital into the bank at the end of September. Losses last year amounted to £6.4m, in line with expectations.

With the securitisation market now functioning again, the group was able to complete its latest securitisation in November, bringing total note issuance last year to £930m. It also renewed its £250m mortgage warehouse facility with Macquarie Bank, which now runs until December 2016, and the total warehouse facilities for buy-to-let lending now stand at £550m. Cash generation continues to strengthen, too, with available cash rising from £177m in September to £222m in January this year. Paragon is also progressing with a £50m share buy-back programme.