H&T set up for another record year

Diversified financial services group H&T (HAT: 355p) delivered a record year of profitability, buoyed by strong growth in its pawnbroking business, an alternative credit market shunned by mainstream lenders. The segment accounted for 71 per cent of H&T’s gross profit of £127mn.

In the 12-month period, the group’s aggregate lending increased by 19 per cent to £260mn, a reflection of the ongoing impact of inflation on customers’ disposable incomes and the withdrawal from the market of other forms of short-term unsecured lending. H&T’s closing pledge book ended the year 28 per cent higher at £128mn with average lending maintained at 65 per cent of the pledged assets' valuation. Importantly, the risk adjusted margin (revenue less impairment divided by average net pledge book) held steady at 61 per cent, so profitability has not been sacrificed. If anything, the group has tightened its lending criteria, reducing exposure to high-end watches to mitigate the impairment risk on unredeemed pledges.

Moreover, with the group’s loan book starting 2024 at a record high, the gold price buoyant, and H&T making a post-period-end acquisition of a £6.1mn pledge book, analysts at house broker Shore Capital expect both divisional and group gross profit to surge 21 per cent this year. The impact on pre-tax profit is more accentuated given the group’s relatively fixed cost base, hence why analysts expect pre-tax profit to rise 27 per cent to £33.5mn, earnings per share (EPS) of 57.2p and a 9 per cent higher dividend of 18.5p. The forecasts are also underpinned by H&T’s robust gold purchasing and pawnbroking scrap activities, both of which increased their profit contribution by more than a quarter in 2023 to account for 10 per cent of group gross profit.

Retail set to rebound after profit reversal

The strength in H&T’s pawnbroking and gold purchasing activities more than offset a 19 per cent decline in gross profit to £14.4mn (11 per cent of group total) from H&T’s retail operations.

These activities were impacted by the decision to reduce stock levels of high-end watches due to sales price volatility, and a shift in the sales mix towards lower-margin and lower-priced new product sales. That said, the growing pledge book will yield an increasing volume of unredeemed items suitable for resale through H&T’s 278 stores, thus driving up the proportion (currently 50 per cent) of higher margin pre-owned stock in the sales mix. Shore Capital pencils in 24 per cent growth in divisional profit this year, a sensible prediction after factoring in last year’s one-off margin hit from reducing inventory of watches.

The potential for another year of double-digit earnings growth is certainly not in the price, with H&T’s shares rated on a forward price/earnings (PE) ratio of 6.2. They offer a prospective dividend yield of 5.2 per cent and trade on a deep 20 per cent discount to year-end book value estimates.

So, having last rated the shares a buy at 342p (‘Why H&T’s markdown is a buying opportunity’, 23 January 2024), I feel the investment risk remains to the upside. Buy.

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