Bargain shares: Primed for a strong recovery

Middlesbrough-based Ramsdens (RFX:161p), a financial services group whose main activities encompass foreign-currency exchange, retail jewellery, pawnbroking and a precious metals buying and selling service, has delivered a resilient trading performance and is placed to deliver a strong profit recovery in the 2021/22 financial year.

The effects of two national lockdowns and restrictions on foreign travel were always going to impact trading by reducing footfall in store, dampening demand for purchases of foreign currency, and in the absence of places to spend their money it also enabled pawnbroking customers to pay down debt. These headwinds are now set to turn into tailwinds.

For example, gross profit of £3.4m earned from foreign currency exchange activities in the 2020-21 financial year was £10m below pre-Covid levels. However, Ramsdens reports that currency sales in the first quarter to 31 December 2021 have trebled year on year, and that was a period in which rules over pre- and post-departure Covid-19 testing changed on several occasions. As pent-up demand is unleashed, expect a boom in foreign holiday bookings for next summer.

Note One: Simon recommended tendering 30 per cent of holdings in Vietnam Holdings at US$4.4528 (322.3p) a share, and tendering 3.9 per cent in the excess application ('Exploiting a tender offer', 4 August 2021), with a view to buying back the tendered shares at the lower market price (284p offer price on 13 and 14 September 2021) when the cash distribution was made during the week of 13 September 2021. Total return reflects these transactions which have reduced the entry point to 188.3p a share.

Source: London Stock Exchange.

Chief executive Peter Kenyon also highlighted that the pawnbroking book increased from £6.1m to £6.8m in the final quarter of last year. Reassuringly, pledges past their due date remain at normal levels. The combination of a high gold price and the need for some customers to seek short-term cash flow in what could be challenging conditions for the less well-off this year are supportive of further growth.

Ramsdens’ jewellery sales were already on an upward trajectory before the pandemic hit and continue to benefit from a range of initiatives including offering greater stock choice – £4m has been invested in inventories; better website functionality; payment flexibility such as interest-free credit offers; and digital marketing and search engine optimisation campaigns.

It’s clearly working as online jewellery sales surged by 70 per cent in the first quarter of 2021/22, having accounted for 16 per cent of divisional revenue of £18.2m in the 12 months to 30 September 2021, up from 10 per cent in the prior year. Premium watches are proving a hot investment, so much so that Ramsdens sold £1m of swanky tickers in December 2021, says Kenyon.

The combination of higher pawnbroking income, recovery in foreign-currency sales (on a higher margin given the exit of rivals from the market), a return to more normalised precious metals trading, and ongoing growth in jewellery sales suggest that a recovery in gross profit from £22.3m to £35.7m is achievable, as analysts at Liberum predict. On this basis, the house broker forecasts a ninefold rise in pre-tax profit to £5m on 43 per cent higher revenue of £58.4m in the 12 months to 30 September 2021, to produce EPS of 12.4p and support a 6.2p a share payout.

I suggested buying the shares as a recovery play, at 142.8p, in my 2021 Bargain Shares Portfolio and priced on a forward PE ratio of 13 and offering a 3.9 per cent prospective dividend yield I maintain my 200p target. Buy.

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