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1pm unloved, and underrated

The specialist provider of finance to SMEs is one of the most lowly rated companies listed on London’s equity markets, and unjustifiably so
January 22, 2019

Aim-traded shares of 1pm (OPM:47p), a specialist provider of finance to more than 20,000 small- and medium-sized enterprises (SMEs), is one of the most lowly-rated companies listed on London’s equity markets, and unjustifiably so.

The company has a flexible business model of either funding its commercial lending using its ‘own-book’ or generating commissions by broking-on business. In the first half to the end of November 2018, 1pm originated £82.3m of new business, of which 40 per cent was self-funded and 60 per cent was brokered-on to other lenders. It ended the period with £71m of headroom on £169m of debt facilities, offering ample credit lines to expand its loan book further.

Combined ‘own book’ assets, loans and the invoice finance portfolio increased by 9 per cent to £142m, funded through credit lines costing an average of 4 per cent a year. Given that 1pm earns a net interest margin of 12 per cent on its ‘own book’ portfolio, it’s clearly a highly profitable business line. Importantly, 1pm has a diversified lending book, which mitigates credit risk. The top 10 industry sectors it lends to account for less than a third of the portfolio, the largest lease outstanding is £300,000, but the average is around £15,000, and the loan-to-value ratio is only 70 per cent on hard assets loans, which account for £91m of the book.

Also, all new and used vehicle finance deals are brokered to other lenders, so there is no balance sheet risk there. It’s also a useful source of revenue as income from vehicle commissions increased by more than half to £1.7m in the first half, accounting for 11 per cent of 1pm’s total revenue. The diversification of the loan book, a strict human-led approach to underwriting risk, and ability to broker-on business are all critical in maintaining credit quality and balance sheet exposure. Reassuringly, net bad debt write-offs actually fell from £0.7m to £0.5m in the six-month trading period.

The point is that the quality of 1pm’s earnings and its ability to earn a 13 per cent post-tax return on equity is not being reflected in a share price that is trading on a miserly six times full-year EPS estimates of 8.1p, up from 7.5p the year before, and 25 per cent below prospective price-to-book value of 63p. A forecast annual dividend of 0.85p a share implies a dividend yield of 1.8 per cent, too. The pullback since the annual results (‘1pm’s record results’, 13 Sep 2018) is a clear buying opportunity in my view. Buy.

 

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