- 2023 EPS and dividend forecasts upgraded by 8 per cent to 23p and 10.4p
- Prospective PE ratio of 10 and forward dividend yield of 4.5 per cent
Middlesbrough-based financial services group Ramsdens (RFX: 228p) continues to outperform analysts earnings expectations, prompting yet another round of upgrades.
Last autumn, house broker Liberum Capital pushed through mid-single-digit upgrades in its earnings per share (EPS) estimates to 18.5p (2022) and 20.1p (2023), but the group smashed its upgraded 2022 forecast, delivering underlying EPS of 20.7p. Moreover, such is the strength of trading in the current financial year that the house broker has been forced to upgrade EPS forecasts yet again, pushing through an eight per cent upgrade to 23p, implying 11 per cent year-on-year growth. The upgrade cycle looks far from over as all four of the group’s businesses are firing on all cylinders and have scope to continue to outperform.
Understanding the drivers of the outperformance
Ramsdens’ foreign currency exchange volumes have recovered to 70 per cent of pre-pandemic levels, growing over 40 per cent in the six months to 31 March 2023. Liberum expects the segment to account for a third of its group gross profit estimate of £44.4mn based on 15 per cent growth in currency volumes to £419mn. However, a small uplift in transaction volumes has an accentuated impact on Ramsdens’ profits given the business earns a gross margin of 3.6 per cent on sales and has a relatively fixed cost base.
For instance, if volumes return to pre-Covid levels of around £500mn on a 3.6 per cent gross margin, then it would drive up current year EPS estimates to 29.4p. Even if volumes only grow to £459mn on a margin of 3.5 per cent then it would support an upgrade in EPS to 25p. It's worth noting that demand for foreign holidays is proving incredibly robust as the UK consumer refuses to go without overseas vacations. The roll-out of a new multi-currency card and foreign currency website is supportive of higher currency exchange volumes, too.
In the first half, the directors also report 20 per cent growth in gross profit from retail jewellery sales, highlighting strong customer demand for premium watch brands and gold products despite the cost of living crisis. This echoes recent comments from rival H&T (HAT:442p), another lowly rated company I am keen on (‘The cost of living crisis is proving a boon for this stock’, 7 March 2023). Liberum expect Ramsdens’ jewellery division to account for a quarter of its gross profit forecast, a forecast that looks well underpinned as customers look to diversify into alternative asset classes as well as investing in gold assets as a store of value.
Indeed, the sterling gold price is trading close to a record high of £1,635 per ounce, having risen 10 per cent in the past 12 months. The strength of the gold price partly explains the 20 per cent year-on-year volume growth in Ramsdens’ precious metal buying activity (accounts for a sixth of group gross profit), the other factor being higher instore footfall post Covid.
The higher gold price is also benefiting the group’s high margin pawnbroking book, helping cash strapped customers to access cash flow by pledging their gold assets as security. Ramsdens’ pledge book has increased 13 per cent to a record £9.7mn since 30 September 2022 and is 29 per cent higher than a year ago. This explains why Liberum expects divisional gross profit to rise 29 per cent to £9.75mn in the 12 months to 30 September 2023, the segment accounting for around 22 per cent of group profit estimates. Importantly, credit quality remains strong with customers maintaining high repayment levels, hardly surprising given that the surging gold price is inflating the value of the assets pledged, thus offering them a compelling reason to redeem their pledges.
Compelling valuation
Ramsdens’ share price rallied 16 per cent to a three-year high of 250p after my last article (‘A winning stock in a cost of living crisis’, 17 January 2023), but even after some profit taking the holding has holding has produced a 65 per cent total return in my 2021 Bargain Shares Portfolio.
Rated on a forward price/earnings (PE) ratio of 10, offering a 4.5 per cent prospective dividend yield and trading on a modest 1.5 times year-end book value estimates, Liberum’s upgraded 280p fair valuation (from 260p) is a sensible target for a company that should deliver a post-tax return on equity of 16 per cent and offers scope for further upgrades. Buy.
■ 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. The books are priced at £16.95 each plus postage and packaging (P&P) of £3.95 [UK], or both books can be purchased for the promotional price of £25 plus P&P of £5.75.
