Cost of living crisis: Pledged to succeed

Economists at investment bank Citi laid down the enormity of the task facing the incoming prime minister, predicting that UK consumer price inflation will hit 18.6 per cent in January 2023.

Unsurprisingly, the key component is soaring energy prices. For a typical medium-sized household, analysts at energy consultancy Auxilione estimate annual bills will exceed £5,000 in January 2023 and more than £6,500 in April 2023. In reality, the average UK domestic energy usage is far higher than the Ofgem price cap figure which is based on standard energy consumption rates (12,000 kWh for gas and 2,900 kWh for electricity).

That’s because families account for 19.3mn out of the 28.1mn UK households, so the data is skewed towards higher usage households rather than the median figure used by Ofgem. The Department of Business, Energy and Industrial Strategy (BEIS) calculates average household usage on much higher energy consumption rates (13,600kWh for gas and 3,600kWh for electricity), implying the average UK energy bill (using Auxilione’s unit forecasts) could hit £5,946 in January 2023, rising to £7,698 by April 2023, up from £1,326 in 2021. The scale of the energy crisis is no longer only impacting poor households, but everyone. Auxilione’s forecast of 21.49p per kWh for gas in January 2023 is three times the summer 2022 price cap level and is equivalent to $408 per barrel of oil. The consultany's gas unit forecast for April 2023 is a third higher still.

This has dire consequences. Research from the University of York estimates that 18mn households will be in fuel poverty this winter, a figure that will have risen further as UK wholesale gas prices have surged 13 per cent since their report was published. Millions of households will have to start dipping into their savings to make ends meet even if additional government support materialises.

Unfortunately, not all are able to, and many are having to turn to alternative ways of funding their lifestyles, as was apparent when H&T (HAT: 460p), a leader in UK pawnbroking, released interim results that prompted massive earnings upgrades last month. Its pledge book is well above pre-pandemic levels and is forecast by analysts to increase by a further 14 per cent by the year-end as the cost of living crisis deepens.

It’s inconceivable that Middlesbrough-based Ramsdens (RFX:194p), a diversified financial services group, is not seeing the same dynamics. In the six months to 31 March 2022, the group’s pawnbroking book increased by £1.4mn to £7.7mn, lending on a sensible loan-to-value ratio of two-thirds of the sterling gold price. House broker Liberum expects the division’s gross profit to increase by a fifth to £8mn in the 12 months to 30 September 2022, rising to £9mn the year after, a conservative estimate given that Ramsdens is well funded to expand its pledge book to meet ever increasing demand.

Moreover, a high sterling gold price is attractive for gold purchasing activities. Ramsdens’ gross profit from this business increased by a third to £3.1mn in the six months to 31 March 2022 as customers sold their jewellery to mitigate the impact of inflation on their disposable income. Liberum is forecasting 58 per cent profit growth in the second half on the same period in 2021, but only a modest increase in the 2022/23 financial year. This is too conservative given the increasing pressures now being placed on households.

The spike in inflation is also a positive for jewellery sales as more affluent customers with spare cash look to hard assets as a store of value as well as benefiting from sterling’s weakness against the US dollar. H&T has yet to see any softness in this activity and Ramsden’s is unlikely to have experienced any either. The group is benefiting from a rebound in foreign exchange currency sales, too, a segment accounting for a third of this year’s forecast group gross profit of £36.7mn.

The bottom line is that the risk to Liberum’s upgraded full-year EPS estimate of 17.3p (‘On the upgrade’, 8 June 2022), up from 0.6p in a Covid-19 impacted 2020/21, is skewed to the upside and there is potential for further upgrades to next year’s EPS estimate of 19p, too. A forward price/earnings (PE) ratio of 10 is hardly exacting for a company making a post-tax return on equity of 14 per cent in a positive earnings cycle, while prospective dividend yields of 4.2 per cent (2022) and 4.7 per cent (2023) add to the attraction. I have fair value around 250p. Buy.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus postage and packaging. Details of the content can be viewed on www.ypdbooks.com.

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