- Annual results beat upgraded forecasts
- Buoyant first-quarter trading update prompts more upgrades
Eye-catching annual results from Middlesbrough-based financial services group Ramsdens (RFX:216.5p) were flagged up in a pre-close trading update when house broker Liberum Capital pushed through mid-singlee-digit increases in its earnings per share (EPS) estimates to 18.5p (2022) and 20.1p (2023) (‘Bargain basement value opportunity’, 7 November 2022). Strong trading in foreign currency exchange (gross profit quadrupled to £12.7mn, accounting for a third of the group total), jewellery sales (revenue and gross profit both increased almost 50 per cent to £27.1mn and £10.3mn, respectively), and precious metal buying (gross profit up 56 per cent to £6.6mn) were key drivers last year.
In the event, Ramsdens smashed Liberum’s upgraded 2022 forecast, delivering underlying EPS of 20.7p. The directors provided a bullish first-quarter trading update for the new financial year, too, prompting Liberum to raise its 2023 EPS estimate by a further 5 per cent to 21.3p, a conservative estimate in my view for multiple reasons.
Firstly, jewellery retail gross profit has increased 15 per cent in the first three months of the 2022/23 financial year, buoyed by premium watch sales to affluent customers, some of whom are diversifying their investments into this alternative asset class.
Secondly, Ramsdens’ pawnbroking book continues to grow, up from £8.6mn in September 2022 to an all-time high of £9.1mn, or 50 per cent higher than in September 2021. The ongoing cost of living crisis coupled with a buoyant gold price (up 17 per cent in the past 12 months to £1,560 per ounce) support further high-margin lending growth. There is also weaker competition from peers NSF (NSF), Morse Club (MCL) and Amigo (AMGO) due to their company-specific problems. The high gold price is clearly positive for Ramsdens’ gold buying.
Thirdly, demand for foreign holidays is proving remarkably strong as the UK consumer stubbornly refuses to sacrifice overseas vacations. For instance, since the beginning of the year, holiday bookings across Advantage Travel Partnership’s chain of 700 travel agents are up by 75 per cent on the same period in 2022. Although Ramsdens’ currency exchange volumes are 70 per cent of pre-pandemic levels, margins are much higher as there is less competition from rivals Hays Travel, TUI and John Lewis. Even a small uplift in volumes this year would have an accentuated impact on profits given the business now earns a gross margin of 3.5 per cent on sales. The roll-out of a new multi-currency card in mid-2023 should boost sales, too.
Prospects for further earnings upgrades are simply not in the price. Strip out net cash of £8.9mn (29p a share), and the shares trade on a historic cash-adjusted PE ratio of nine. They also offer a dividend yield of 4.1 per cent and are rated on 1.6 times book value even though the group delivered a 17 per cent post-tax return on equity in 2022. The holding has produced a 51 per cent total return in my 2021 Bargain Shares Portfolio and I feel Liberum’s upgraded 260p target is achievable. Buy.
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