Middlesbrough-based Ramsdens (RFX:177p), a diversified financial services company whose main activities encompass foreign currency exchange, retail jewellery, pawnbroking and a precious metals buying and selling service, has reported a mid-single-digit rise in pre-tax profits to a record £6.7m on revenue of almost £47m in the financial year to 31 March 2019, a stellar performance for any company trading on the high street right now.
The outcome was even more impressive once you take into account the absence of a peak Easter trading period, investment in nine new stores and their first year start-up trading losses, and last summer’s heat wave that led to a boom in staycations and dampened demand for foreign currency exchange services. Despite this headwind, Ramsden exchanged almost £500m of foreign currency for 705,000 customers to edge up gross profit from this activity to £11.6m.
There was a notable increase in the contribution from selling second-hand jewellery and luxury watches across the estate, and online too. Divisional gross profit rose by more than a fifth to £5m on a margin north of 50 per cent, driven by cross-selling its retail jewellery to a growing customer base, investing in new stock and improving display, branding and product mix. E-commerce sales soared by 77 per cent, and should continue to make strong headway as this segment still only accounts for 5 per cent of the jewellery sold.
A quarter of Ramsdens’ gross profit of £30.5m last year was generated from pawnbroking. Pledges are low ticket items, which mitigates risk, while a client base of 36,000 customers diversifies default risk on a pledge book of £7.6m. This is a high-margin business that produces a yield north of 100 per cent on the loan book, and a modicum of growth as divisional gross profit rose by 8 per cent to £7.5m.
Precious metal buying for scrap is also useful contributor, accounting for 16 per cent of the company’s gross profit. Moreover, as I noted when I included Ramsdens’ shares, at 165p, in my 2019 Bargain Shares portfolio, you have a free option on potential upside in the sterling value of gold either as a result of sterling weakening against the US dollar in the event of a hard Brexit, or, alternatively, on US dollar weakness if the US central bank eases monetary policy by cutting rates, which should boost the precious metal complex. I maintain my view that precious metal prices will rise faster than the dollar will fall in that scenario. Either way, this is good news for both Ramsdens’ precious metal buying activities, and its pledge book too.
Shrewd acquisitions
It’s not the only good news, either, as just before the financial year-end, Ramsdens acquired 18 stores that had been trading as The Money Shop for £1.5m in cash. They have since been rebranded as Ramsdens. The company subsequently acquired four additional The Money Shop stores, and 12 loan books, thus offering a low-cost and low-risk opportunity to scale up its market-leading foreign exchange service in new locations – the store estate has increased from 131 to 163 stores since March 2018 – and improve the performance of newly acquired ones stores. To put this into some perspective, existing Ramsdens stores make a pre-tax profit of £48,000 each whereas guidance from management is for The Money Shop stores from the March acquisition to contribute £33,000 each in the 2021 financial year.
Ramsens still retains net funds of £8.2m (26.6p a share) and has access to a low-cost £10m revolving credit facility, which gives it ample firepower to fund further selective bolt-on deals, invest in the newly acquired shops to drive up their profitability, or roll-out further new stores. It certainly makes sense to continue to target an organic roll-out programme by recycling the company’s strong operating cash flow given that new stores have a targeted cash payback period of just 30 months on capital investment.
Shareholders are rightly being rewarded as the dividend per share has been lifted by 9 per cent to 7.2p a share, covered more than two times by adjusted earnings per share (EPS) of 17.4p. Analysts at broking house Liberum Capital are forecasting a payout of 7.4p from EPS of 19p in the 12 months to the end of March 2020. On this basis, the shares are priced on a forward cash-adjusted price/earnings (PE) ratio of eight, offer a prospective dividend yield of 4.3 per cent and are rated on a price-to-book value ratio of 1.7 times. That’s an attractive rating for a company that has just delivered a post-tax return on average equity of 17.6 per cent, and one that should be able to deliver 25 per cent pre-tax profit growth over the next two financial years from acquisitions made, and organic expansion.
A target price around 250p seems a far more sensible valuation, based on a cash-adjusted PE ratio of 10 for the 2020-21 financial year when analysts estimate Ramsdens will be making EPS of 21.3p and have a net cash pile of 40p a share. Buy.
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