- First half pre-tax profit rises 31 per cent to £8.8mn
- Gross profit increases 15 per cent to £55mn
- EPS up 24 per cent to 16.26p
- Dividend hiked 30 per cent to 6.5p
Diversified financial services group H&T (HAT: 400p) is delivering strong growth in its pawnbroking business, an alternative credit market shunned by mainstream lenders.
In the first half, the pledge book surged 14 per cent to a record £114.6mn and is 35 per cent higher than 12 months ago, reflecting an increasing need of customers to access short-term credit to meet their cash flow requirements. Growth is also being driven by reduced market supply as several firms have exited the unsecured lending market.
Importantly, credit risk is not being sacrificed with the average loan to value maintained at 65 per cent on an average pledge of £423. Redemption rates remain high at 85 per cent and the average loan duration of 97 days is 11 days shorter than the historic long-term average as clients opt to repay loans early when able to do so.
Moreover, with net margins maintained above 60 per cent, H&T’s gross profit from this activity increased 41 per cent to £32.4mn to account for two-thirds of the group total. House broker Shore Capital expects the progress to be maintained in the second half, too, raising its year-end pledge book forecast from £118mn to £126mn, a prediction the directors are comfortable with.
The booming pledge book is benefiting pawnbroking scrap sales as typically 60 per cent of unredeemed pledges are scrapped for their gold content. Gross profit from this activity soared 85 per cent to £2.6mn. Moreover, the high gold price coupled with the impact of high inflation on customers' disposable income is driving higher volumes in H&T’s gold and jewellery purchasing activities. Divisional gross profit soared 50 per cent to £4.2mn.
Shortfall in retail, but travel money sales booming
H&T is a retailer of high quality pre-owned jewellery and high end watches, too. Although demand for premium watches remains high, the group educed stock levels in certain slower-moving brands due to changes in sentiment of some customers towards value. This factor coupled with a constrained supply of 14 and 22 ct gold second-hand jewellery led to a higher proportion of lower margin new jewellery sales in the mix, hence why gross profit from retail activities declined 27 per cent to £6.3mn, accounting for 13 per cent of the group total.
However, Shore Capital expects H&T to recover some of the shortfall in the second half, pencilling in a much smaller five per cent decline in retail gross profit for the full year. It looks a sensible prediction given that the slow-moving stock has now been cleared, strong pledge book growth will drive higher volumes of unredeemed pre-owned jewellery to be released for retail sale or scrap, and H&T has implemented price increases across the range.
It’s worth noting, too, that H&T’s foreign currency transaction volumes are at record levels. In the first half, the group converted £84.2mn of foreign exchange across 212,000 transactions at a gross margin of 3.4 per cent to generate net income of £2.9mn. H&T’s directors expect a strong second half performance, adding weight to Shore Capital forecast of 38 per cent higher full year gross profit contribution of £9mn, accounting for eight per cent of the group total.
Impact on forecasts
Although Shore Capital clipped its full-year operating profit estimate by £1.9mn to £32.4mn to reflect the lower than expected retail contribution, this still represents 58 per cent year-on-year growth. True, annual finance charges are predicted to increase from £1.5mn to £2.9mn due to the higher cost of funding and ongoing investment, but H&T’s full-year pre-tax profit is still forecast to increase 55 per cent to £29.5mn.
On this basis, expect 44 per cent higher full-year EPS of 53.7p and a similar hike in the dividend per share to 21.5p. This implies the shares are rated on a modest price/earnings (PE) ratio of 7.4, offer a prospective dividend yield of 5.4 per cent and are trading below estimated year-end book value of 416p. That’s a compelling rating and one that completely ignores the possibility of the well-funded group delivering 30 per cent EPS growth in 2024, as analysts predict, driven mainly by growth in pawnbroking activities.
H&T shares have delivered a 39 per cent total return in my 2022 Bargain Share Portfolio, and I feel the share price drift since the annual results represents a repeat buying opportunity. Buy.
