S&U profits fall on higher charges

Whatever the broader financial picture for lenders, the demand for credit to fund large capital purchases for groups in society that may not have easy access to conventional credit is the main reason for S&U’s (SUS) longevity in the market. If customers are happy to pay 30 per cent APR on car purchases and property buyers who understand the complexity of bridging loans are prepared to take the risk, then the company’s high margins over its own borrowings do the talking from an investment perspective.

However, there were clues in these results that a period of adjustment to higher rates is rippling up and down the whole finance chain. For example, impairment charges for bad loans in the Advantage car loans business were higher at £13.8mn, triple last year’s £4.1mn, which represented a return to levels seen just before the pandemic. At the same time, finance costs almost doubled to £7.5mn as variable interest rates on the company’s own loans moved higher.

Management sees its main risk as the substantial changes in employment affecting the ability of its customers to repay loans. In cases where repossession of vehicles has taken places, high second-hand market prices has helped offset the potential loss for S&U. Predictions for the direction of used car market vary, but a lack of supply should help keep prices stable this year.

S&U’s combination of high regular dividends and high margins give the shares an attraction that combines a consensus price/earnings valuation of 9 for 2024, with a dividend yield over 5 per cent, which appeals to income and value investors. Definitely a share to keep this year. Buy.  

Last IC View: Buy, 2,050p, 27 Sep 2022