Impairments plunge at S&U

S&U (SUS) is celebrating a record year. After a bumpy start to the lockdown, the car finance specialist has seen profit before tax overtake pre-pandemic levels by more than a third. 

Growth has been driven by a £33mn reduction in loan impairments, which dropped to just £4.1mn last year. The group attributed the fall to surprisingly benign economic conditions, the skill of its collection team and strong used car values. The last point meant that when vehicles were repossessed – or when agreements were cancelled early – S&U received a good price at auction, narrowing its loss. 

On revenue of £78.9mn, the motor finance arm’s return on capital employed reached a healthy 19.4 per cent.

Impairments are unlikely to remain so low. S&U predicts that the price of used cars will begin to flatten and dip towards the end of this year as supply picks up, while the cost of living squeeze is likely to affect customers’ willingness and ability to borrow. 

However, receivables from customers reached a new high of £323mn at year-end, promising future growth. Indeed, analysts at Peel Hunt concluded that double-digit loan growth is achievable for financial year 2023 and beyond. They expect earnings per share growth to follow a similar trajectory once impairment distortions have worked their way through.

It is also worth noting that S&U has diversified its lending book via its property lending service, Aspen. The five-year-old property bridging operation is small, but profitable, and transaction numbers are rising fast, up by nearly 70 per cent year on year. 

While macroeconomic concerns seem to be weighing on S&U’s share price – and are likely to set off alarm bells for some investors – S&U’s business model has proved resilient and well-managed. Buy. 

Last IC View: Buy, 2,560p, 9 Dec 2021