- Annual revenue down 3 per cent to £5.7mn
- £0.7mn bad debt provision
- Pre-tax profit down 26 per cent to £2.1mn
- 2.53p per share dividend maintained
Commercial lender Vector Capital (VCAP:29p) took the decision to reduce lending last year due to more challenging property market conditions and the negative impact of rising interest rates and inflationary pressures on its customers.
The company offers secured property loans to small property developers who buy properties to refurbish and re-sell. Some of these customers have been impacted by delays in completions, higher building costs and a general softening of property values. At the same time, the higher stress tests applied by traditional banks have made it more difficult for small developers using bridging and development finance to re-finance their loans to buy-to-let mortgages and term finance. The higher cost of borrowing has also impacted their ability to sell properties as buyers struggle to get mortgages.
So, to reflect the possibility of shortfalls arising in 2024 and 2025, the board has prudently taken a £0.7mn provision for doubtful debt on the £47.9mn loan book, which is spread across 108 live loans and has an average loan size of £0.45mn. The impairment charge accounted for all the pre-tax profit shortfall in 2023. That said, the group does hold material security with the loan book secured on £87.5mn of property assets, implying a conservative loan-to-value ratio of 59 per cent. It is possible that when market conditions improve as Bank of England lowers interest rates then some of the provisions could reverse in due course.
Low rating highlights a deep value opportunity
Importantly, Vector is in the fortunate position of funding the loan book from both shareholder capital and a £45mn wholesale funding facility. At the year-end, the group had £27.8mn of unutilised debt facilities, which meant that the majority of the loan book, which earned an average interest rate of 10.5 per cent, is being funded from its own capital. The high return on the lending supported a maintained dividend of 2.53p a share that was covered 1.4 times by earnings per share (EPS) of 3.5p.
On this basis, the shares offer a dividend yield of 8.7 per cent and are rated on a modest price/earnings (PE) ratio of 8.3. They are also priced on a hefty 48 per cent discount to book value of 56.4p even though the company reported a 9.3 per cent pre-tax return on equity.
Admittedly, house broker WH Ireland is looking for a flat performance this year, but equally analyst John Cummins sees scope for a material 33 per cent earnings recovery in 2025 when market conditions improve. So, although the share price has drifted from the 34p level when I covered the interim results last autumn, I feel that Vector’s recovery potential is being woefully underrated. Recovery buy.
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