- Pledge book surges 50 per cent since start of 2021
- 2021 dividend of 12p a share is 20 per cent above forecasts
- EPS and dividend forecasts raised for 2022 and 2023
- Full benefit of spike in the gold price not factored into upgraded earnings estimates
The backdrop could not be any more favourable for H&T (HAT: 290p), a diversified financial services group and the market leader in UK pawnbroking, a segment of the alternative credit market that is shunned by the mainstream lenders. As a sign of confidence, the board has raised the 2021 payout by 41 per cent to 12p a share, and with good reason. Chief executive Chris Gillespie noted during our results call that "the business is growing at a rate that it hasn't seen in living memory".
Even before the Ukraine crisis led to soaring energy and commodity prices, UK consumers were facing up to the highest inflation rates in more than 30 years and a sharp drop in real income, too. The outlook has got a lot more challenging. For example, this month’s surge in energy prices could mean that the October energy price cap spirals a further 72 per cent to more than £3,400, effectively trebling the bills of the average household since March 2021.
H&T’s pawnbroking business provides credit (average pledge £339) to customers with assets to pledge (mainly gold and jewellery) so that they can cover their short-term cash flow. The group’s pledge book has been growing strongly since the UK lockdown ended last year, so much so that it has risen 50 per cent to £72.2m since the start of 2021. Furthermore, the gold price has surged by 16 per cent to £1,564 per ounce since the start of 2022, which offers greater security on pledges already made and is helping to drive the lending book higher. Indeed, the first week of March was a record for pawnbroking, says Gillespie. The rise in the gold price is also positive for selling scrap gold when customers fail to redeem their pledges, and gold purchasing activity.
Not all H&T customers need to borrow as the group reported a surge in online and in-store retail sales last year, buoyed by increased interest in high-end watches, improved inventory levels and smarter websites. Also, as holidaymakers take to the skies once again, they will drive up H&T’s earnings from foreign currency exchange (3.9 per cent of group gross profit in 2021).
In addition, having stopped making high-cost short-term credit unsecured loans, H&T has drawn a line under the matter with the Financial Conduct Authority by making a £2.1mn (5p a share) provision to cover the likely financial redress. The group’s net assets of £136.6mn (349p a share) at the end of 2021 included cash of £17.6mn, property (£11.1mn), inventories (£28.2mn) and a £66.9mn pledge book, so H&T can easily afford the fine.
House broker Shore Capital has taken note, upgrading its 2022 and 2023 earnings per share (EPS) estimates by 4 per cent to 32.2p (from 20.8p in 2021) and 40.8p, respectively, and raising its dividend estimates to 14p (from 13.5p) and 18p (from 16.5p). On this basis, the shares, at 290p, trade on a 2022 forward price/earnings ratio of nine, offer a prospective dividend yield of 4.8 per cent and are priced 17 per cent below book value. Moreover, Shore Capital has not factored in the full benefit of the spike in the gold price into its forecasts for gold purchasing and the pawnbroking businesses, thus “leaving upside potential”. Analysts add that the “pick up in profitability could be considerable”.
I agree and believe my 400p price target is conservative, having suggested buying the shares, at 287p, in my 2022 Bargain Share Portfolio. Buy.
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