Why H&T’s markdown is a buying opportunity

It’s not often that a company announces a 40 per cent increase in annual pre-tax profits and is rewarded with a 14 per cent share price markdown. However, that was today’s reaction to the pre-close trading update from financial services group H&T (HAT: 342p), an alternative credit market shunned by mainstream lenders. The issue being that the bumper growth, all of which was organic, fell 10 per cent short of house broker Shore Capital’s forecasts.

December was challenging for H&T’s retail business, which accounted for 12 per cent of last year’s estimated gross profit of £120mn. That’s because more customers shifted their buying preference towards lower-margin and lower-cost new jewellery (33 per cent of sales) rather than higher-margin second-hand items (62 per cent). That said, sales volumes still increased 15 per cent in the fourth quarter.

In addition, although H&T’s foreign currency exchange business increased gross profit by 11 per cent to £6.3mn, it was below analysts’ £9mn forecast, a reflection of the competitive market and a need for the business to build brand awareness. It’s still growth, something H&T’s major income generator, its pawnbroking business, is delivering in spades.

The unit’s closing record pledge book of £130mn was up 30 per cent on 2022, with both loan-to-value ratios and redemptions steady at 65 and 85 per cent, respectively. The strong momentum has continued into January, hardly surprising given that many consumers are still feeling the pinch in an inflationary environment. Divisional gross profit surged almost 30 per cent to £82mn, or more than two-thirds of the group total, and is forecast to grow 25 per cent this year given the higher run rate.

The high gold price not only supports higher lending activity, but it is boosting gross profit from gold purchase and pawnbroking scrap gross profits, which increased by more than a third to £14.1mn in 2023. Shore Capital embeds 21 per cent growth in these activities in its 2024 pre-tax profit estimates of £33.5mn.

Admittedly, revised estimates are 9 per cent shy of previous forecasts, but they still imply 18 per cent higher earnings per share (EPS) of 57.4p and another double-digit hike in the payout to 19p a share. On this basis, the shares are rated on a miserly forward price/earnings (PE) ratio of 5.9 and offer a forward dividend yield of 5.6 per cent. Buy.

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