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OPINION

Award winning growth

Award winning growth
June 5, 2014
Award winning growth
IC TIP: Buy at 73p

I included the shares in my 2014 Bargain Shares Portfolio when the price was freely available around 54p at the start of trading on Friday, 7 February. Since then the shares have risen by over 30 per cent to a multi-year high on the back of some very positive news flow and a strong operational performance.

This progress has not gone unnoticed in City circles, as the company was named Small Cap Company of the year at the prestigious Small Cap Awards at the end of May. Moreover, chief executive, Maria Hampton and finance director, Helen Walker were jointly awarded Small Cap Executive Director of the year. Investors are impressed too as the company has just announced that it has negotiated an additional block discounting facility of £4m of which £3m is a new funding line and £1m represents an increase on an existing facility.

As I have noted when I initiated coverage four months ago, by sourcing clients through a network of 70 finance brokers, 1pm has been able to grow its business at quite a pace but without compromising on credit quality. By maintaining strict underwriting criteria and credit management, the company has been delivering profitable growth while at the same time keeping bad debts down to a minimum.

But the major constraint to achieving such stellar growth is the capital needed to support the business. Hence, the new credit lines of £4m which are in addition to the £7.3m of fresh funding raised in the past 12 months, including £2.5m of new credit facilities a couple of months ago. Interestingly, 1pm has largely funded its business by attracting investments from high net worth individuals and self-invested personal pension funds (Sipps). The company also raised £1.5m of new equity from fund manager Henderson Global Investors last year.

Capital well deployed for growth

It is clear that this new capital has been put to good effect as 1pm reported a 25 per cent rise in net receivables to £15m at the half year stage to the end of November 2013, and analyst Eric Burns at broking house WH Ireland predicts the loan book will have risen to £18.5m by the 31 May 2014 financial year-end. Expect a pre-close trading update imminently.

Given the double digit growth rates in the loan book, it is just as important that the lending risk is spread sensibly without over exposing 1pm to any one customer. The company is certainly achieving this as the average lease agreement is modest at £8,500, the average lending term is 40 months, and no single customer accounts for more than 0.4 per cent of the leasing portfolio. In fact, bad debts account for a meagre 0.6 per cent of the lending book in its entirety.

Moreover, by locking in all borrowing and lending at fixed rates, and credit checking all businesses and guarantors to mitigate the risk of default, it’s proving a profitable niche to be operating in. Analysts at WH Ireland anticipate the company will turn in pre-tax profits of £1.2m on revenues of £3.8m in the 12 months to end May 2014, up from £754,000 and £3m, respectively, a year earlier. On this basis, EPS rises from 2.63p to 3.1p.

But markets are always forward looking, and investors are more interested in what can be expected in the coming year and beyond. It’s therefore worth noting that with new funding in place, 1pm looks on course to grow its loan book to almost £20m by in the next 12 months as analysts anticipate. On that basis, expect revenues to rise a further 10 per cent to £4.2m to boost pre-tax profits by around 25 per cent to £1.52m and lift EPS to 3.95p.

Rating not overextended

So with 1pm’s shares trading on a bid-offer spread of 71p to 73p, the prospective PE ratio is 18, a rating that doesn’t look too punchy for a company that is on course to report 18 per cent growth in EPS in the financial year just ended, and one that is forecast to accelerate EPS growth to 28 per cent in the current financial year.

On a peer group basis, the rating doesn’t look extended either as rival Secure Trust Bank (STB) trades on 19.5 times prospective earnings. True, car finance and home credit lender S&U (SUS) is priced on 15 times earnings estimates, but that company is only expected to generate EPS growth of 15 per cent this financial year or half the growth rate of 1pm.

It’s worth flagging up too that the fast growing UK economy should underpin demand for leasing finance from SMEs and 1pm is very well placed to capitalise on this growth. The fact that the company has raised £6.5m of additional funding in the past couple of months is an indication of the demand it is seeing for lending from this particular segment of the market, and one that the larger banks are still reluctant to fully service as they had done previously prior to the financial crisis.

In my opinion, there is even scope for 1pm to outperform these earnings estimates especially since its new business loan product is proving a great success. Interestingly, WH Ireland had not factored in any contribution from business loans into its forecasts for the fiscal year just ended. Considering the aim is to generate a 21 per cent yield on this business, then it’s a fair assumption to make that the risk to the contribution here is to the upside. Furthermore, 1pm has raised the maximum business loan size from £15,000 to £25,000 over a maximum term of three years, reflecting the demand it is seeing for this specific product.

So with all parts of 1pm’s business firing on all cylinders, I continue to see further upside in the shares and feel fair value of 80p is a realistic target. Trading on a bid offer spread of 71p to 73p, I continue to rate 1pm shares a buy ahead of the forthcoming pre-close trading update and next month’s full-year results.

■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'