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Exploiting the Brexit discount

Fears over the UK's political future means a buying opportunity at a specialist lender
July 31, 2018

Aim-traded shares of 1pm (OPM:47p), a specialist provider of finance to more than 16,000 small- and medium-sized enterprises (SMEs), have drifted from the 52p level when I last advised buying ('Six small-cap plays', 22 Jan 2018), but this is in no way a reflection of the company’s operational performance.

Ahead of annual results in mid-September, a pre-close trading update revealed that the company will post record revenues of £30m, representing a 75 per cent increase overall and 30 per cent growth on an organic basis after stripping out acquisitions. Analysts at Hardman & Co expect 1pm’s pre-tax profits to almost double to £7.9m to lift EPS by more than a fifth to 7.9p after taking into account the increased share count – 1pm raised £13m in a placing and open offer pitched at 45p a share in May 2017 to fund the acquisitions of Gener8 Finance, a leading invoice finance provider to SMEs, and Positive Cashflow Finance, a factoring and invoice financing provider.

Strategically, the move into invoice discounting and factoring made sense as these products are now being offered alongside 1pm’s existing asset finance and business loan offerings, and they have diversified the company’s revenue streams. Furthermore, debt facilities are generally provided on a 5:1 basis for established invoice finance businesses which means that equity can generate a return of 30 per cent a year or more.

The 2015 and 2016 acquisitions were strategically important, too: Academy Leasing, a provider of equipment finance and an equipment and vehicles broker to the SME market; and Bradgate Business Finance, a leading independent specialist provider of 'hard' asset finance to clients buying business equipment within the construction, recycling and haulage sectors. The acquisitions have enabled 1pm to act in a broking capacity, referring deals for cash commissions, and allowing risk to be better managed; diversified its loan book; and given the company access to greater funding lines and at a lower cost too. That’s a reflection of the larger scale of its operation which has de-risked the proposition to 1pm's own lenders. Also, with the benefit of 1pm’s credit lines, Academy and Bradgate have been able to fund deals that would have otherwise been brokered on previously.

 

Acquisitions delivering results

All these factors were in evidence in the company’s pre-close trading update, which revealed that 1pm’s loan portfolio increased by 50 per cent to in excess of £130m in the 12 months to the end of May 2018, including organic growth of 10 per cent, funded by over £160m of debt facilities, or more than two times the level 12 months earlier. Furthermore, with the blended cost of borrowing reduced from 5.3 per cent to 4 per cent year on year, more of the income earned on its lending is being retained by shareholders rather than debt holders, driving up the company’s net interest margin to a record level.

Of course, fast-growing 1pm still only has a tiny share of the £93bn UK market for SME lending that’s being under-serviced by the UK’s high street banks post the 2008 financial crisis. Clearly risk has to be controlled, so it’s reassuring that management adopts a cautious approach to underwriting. Indeed, the 10 per cent organic growth in 1pm’s loan portfolio was bang in line with industry growth rates at the smaller ticket end where the business specialises. Also, although new business originations increased by 70 per cent in the 12-month trading period, about 44 per cent was written on 1pm’s 'own-book' and the majority was brokered-on business to other funders to generate cash commissions, highlighting the benefits of the Bradgate and Academy Leasing acquisitions.

The fact that 1pm has in recent months negotiated increased block discounting facilities totalling £62m with six existing funding partners, and £35m of additional funding from the British Business Bank under an asset finance facility, is indicative of the quality of its loan book.

 

Accelerated dividend policy

I would flag up that having integrated all seven acquisitions made in the past three years, and to reflect the lower operational risk of the business, the board has announced a 30 per cent hike in the annual dividend to 0.65p a share, and plan to recommend a 30 per cent increase thereafter in the three-year period to 31 May 2021. This implies dividends per share of 0.85p, 1.1p and 1.42p for the next three financial years – an attractive proposition.

It’s also worth noting that 1pm’s shares are rated on a miserly six times likely EPS of 7.9p for the financial year just ended, a valuation applicable to an ex-growth company, rather than one that has been delivering decent growth and is forecast to lift pre-tax profits to £9m on revenues of £32.5m in the 12 months to the end of May 2019. If 1pm can maintain a quality loan book with low impairments, then a market capitalisation of £40.5m is a bargain for a business that is making a double-digit post-tax return on equity. For good measure, the shares are priced on a 17 per cent discount to my £48m estimate of spot book value.

True, the retirement in December of Mike Nolan, the founder of Academy Leasing, creates uncertainty over his 6.3 per cent shareholding. But given that fund managers have been taking advantage of the low valuation – Sapia Partners increased its stake from 12 to 13 per cent a few weeks ago – there are buyers around and ones who undoubtedly share my view that the hard ‘Brexit’ discount embedded into 1pm’s valuation is extreme to say the least.

If anything, more SMEs are likely to need 1pm’s services – invoice discounting and factoring being the obvious ones – if the UK’s exit from the EU results in a longer average debtor days on their receivables, a real possibility if the country leaves with no Brexit deal. That could be a boon for 1pm’s business. Also, if a Brexit deal is agreed with the EU then this could trigger pent-up demand for SME financing from companies that have been holding back their investment commitments. Either way, it’s not difficult to make a case for a share price 50 per cent higher than the current level. Buy.

 

■ Simon Thompson's new book Successful Stock Picking Strategies can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source and is priced at £16.95 plus £2.95 postage and packaging. Full details of the content is available on YPDBooks website.

Simon's second book Stock Picking for Profit has been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. Simon has published an article outlining the content: 'Secrets to successful stock picking'