Pawn pays for H&T

The gold boom of 2009 to 2012 created a wonderful environment for pawnbrokers as the soaring price of the yellow metal boosted both profits on purchasing operations and the value of pledged collateral. H&T's financial performance benefited and pre-tax profit reached £26m in 2010. But, of course, the trend was not to last and, as the gold price flopped, many pawnbrokers found themselves in difficulties. Former Aim-traded rival Albemarle & Bond was one that went into administration. While H&T's profits also suffered, its strategy to open retail outlets for selling jewellery has provided an extra revenue stream, keeping it in business even as turnover from the pledge book fell.

But 2016 has seen the gold price back on the rise again, as capital scrurries for a safe haven. This is good news for H&T. It reduces the possibility of the group losing money on a pledge given that the value of its collateral is rising. It also encourages more customers to pledge gold - or even to sell it - given the more favourable prices they receive. Meanwhile, the profitability of its second-hand jewellery retailing has also improved.

But it's not just the favourable macro environment that is attractive about H&T. One striking feature of the group's performance since 2013 has been the excess of net cash flow in relation to net income. This cash generation has helped to strengthen the balance sheet. In 2009, net debt peaked at £42m, but this had been reduced to just £2.1m at the end of 2015. With a £50m bank facility still in place, H&T has more than enough spare capacity to increase its pledge book of customer loans and return cash to shareholders. Indeed, the divided was hiked 67 per cent in 2015 and analysts at broker N+1 Singer forecast a payout of 8.6p a share this year, implying a prospective yield of 4 per cent on a payout covered twice by forecast earnings. The cash-generative capabilities have also allowed the group to open up new business divisions and Personal Loan, Foreign Exchange and Buyback services all made an increased contribution to turnover in 2015.

True, H&T has further work to weed out underperforming outlets and faces increasingly tough regulations that curb its lending activities. Yet the favourable marketplace and positive outlook has already attracted the attentions of investors, and the share price is up 19 per cent since February. But we still feel that the forecast hike in earnings has yet to be fully priced into the shares. Currently, they trade on little more than 12 times forecast earnings for 2016 and their price is 14 per cent below net asset value, much of which is tied up in inventories and cash.