- Increased loan loss provisioning charge
- A 10 per cent cut in the annual dividend
Within S&U’s (SUS) full-year review, its chairman Anthony Coombs ventured that the challenges faced by the motor and property finance group were neatly summed up by one of ancient Rome’s “five good emperors”, Marcus Aurelius, who stated that “sometimes the art of living is more like wrestling than dancing”. Coombs might well have substituted the observation of the emperor Augustus who maintained that anyone in search of a rainbow had “to deal with the rain”.
The challenges facing the group were laid bare in a February profit warning which detailed falling loan advances for its Advantage motor finance business, exacerbated by high interest rates and the “intemperate economic climate in Britain”. The cumulative impact of these factors was largely confined to the final quarter of the year but reflected in a loan loss provisioning charge of £23.3mn, against £12.9mn in the prior year. Take these one-off charges out of the equation and gross profit was 17 per cent to the good at £92.6mn. Additionally, total new deal numbers were over 21,500 and on budget.
The performance of Advantage belies the state of the automotive market in general. In recent years, sales volumes have been constrained by supply chain difficulties and beefed-up environmental controls, but S&U now has to contend with an investigation into motor financing by the Financial Conduct Authority (FCA). Management notes that the regulator's intervention has already increased Advantage's operating costs, while inhibiting both the range of products on offer, and Advantage's ability to help its customers maintain their loan repayments.
You would imagine that the interest rate environment and its cooling effect on mortgage applications would have weighed on the financial performance of Aspen, the group’s property bridging loan specialist, yet it increased revenue by a third and drove reported profits to a record £4.8mn.
Somewhat counter-intuitively given wider macroeconomic strains, client numbers in both the group’s trading segments are at record levels. And that has fed through to repayment schedules, up by 18.5 per cent to £370mn on the prior year.
S&U exited the year with record net receivables, which is fine assuming the monthly repayment rate does not deteriorate – it was slightly down on the prior year at a still respectable 92.1 per cent. Financing costs are a cause for concern, but gearing remains “well within banking covenants”. As to the investment case, although the dividend yield might still warrant a speculative position, the group is now “wrestling” with the ongoing industry-wide FCA inquiry, so the 5 per cent discount to net assets may no longer adequately reflect the balance of risks. Hold.
Last IC View: Buy, 2,270p, 3 Oct 2023
| S&U (SUS) | ||||
| ORD PRICE: | 1,828p | MARKET VALUE: | £222mn | |
| TOUCH: | 1,820-1,880p | 12-MONTH HIGH: | 2,570p | LOW: 1,750p |
| DIVIDEND YIELD: | 6.6% | PE RATIO: | 9 | |
| NET ASSET VALUE: | 1,927p | NET DEBT: | 96% | |
| Year to 31 Jan | Turnover (£mn) | Pre-tax profit (£mn) | Earnings per share (p) | Dividend per share (p) |
| 2020 | 89.9 | 35.1 | 240 | 120 |
| 2021 | 83.8 | 18.1 | 121 | 90.0 |
| 2022 | 87.8 | 47.0 | 313 | 126 |
| 2023 | 103 | 41.4 | 278 | 133 |
| 2024 | 115 | 33.6 | 209 | 120 |
| % change | +12 | -19 | -25 | -10 |
| Ex-div: | 20 Jun | |||
| Payment: | 12 Jul |
