Bargain Shares 2024: Markets will soon back this smart plan to cut debt

Liverpool-based Anexo (ANX) is a provider of a complete litigation claims process focused on the recovery of credit hire and repair costs for the impecunious non-fault motorist involved in a road traffic accident (RTA). It also has a booming housing repair business, and provides funding to support class actions against carmakers in relation to emissions cases.

By offering both credit hire and legal services, Anexo has a competitive advantage over pure credit hire companies (which lack the in-house capacity to litigate a customer’s claim), and solicitors (who lack a vehicle fleet to offer to motorists). Anexo is allowed to charge higher credit hire rates rather than spot hire rates by offering its services to customers deemed impecunious. These are individuals without the means to pay in advance for car hire following a non-fault RTA, and are mainly those who only have third-party insurance and are without access to a replacement vehicle. Anexo then recovers these charges from the at-fault insurer at no upfront cost to the individual. Its fleet of 1,902 vehicles comprises motorcycles (owned by the company) or leased cars, so benefits from economies of scale.

Understanding the credit hire market

The total credit hire market comprises around 300,000 cases each year, of which Anexo has a 3 per cent market share.

Importantly, the company has counter-cyclical characteristics in the current economic environment, given the number of impecunious people increases in a cost of living crisis. This segment of society is likely to try to save money by extending the life of their vehicle, thus making them more susceptible to RTAs, too. Still, many of these additional RTAs will not be the fault of the driver, which in turn creates demand for Anexo's services.

Another driver of demand is the high growth of couriers and gig economy workers for whom access to a vehicle is essential. More than half the UK's estimated 7.2mn gig economy workers are drivers. Furthermore, hard-pressed motorists can make cost savings by switching from cars to motorcycles to save money in times of hardship. That’s good news for Anexo as motorcycles account for two-thirds of its fleet, with an emphasis on the courier market. A rigorous screening process means Anexo has a 98 per cent success rate at trial.

Working capital management

The major issue that has undermined investor sentiment towards Anexo is the time it takes to collect the debtor book. It means that borrowings increase if Anexo chases the market opportunity. That’s not aligned with the board’s desire to reduce net debt, and explains why the credit hire business is now being run for cash. 

So, although credit hire is an important part of the business, the directors have been recycling cash flow from credit hire claims settlements into other business lines that offer higher returns on capital employed and a faster investment return. That also supports an ongoing reduction in the net debt position.

A large proportion of Anexo’s receivables of £233mn at its half-year-end were in the credit hire division. Current assets of £242mn were more than double the group’s total liabilities of £99.7mn; the latter figure includes borrowings and lease liabilities of around £68.5mn. So, by reducing the credit hire receivables book, the group can materially de-risk its balance sheet.

Housing disrepair business

One such new income stream is Anexo’s fast-growing housing disrepair business. Specifically, Anexo provides the funding for tenants making claims against landlords under the Homes (Fitness for Human Habitation) Act 2019. As the name suggests, the act came into force to make sure that rented houses and flats are fit for human habitation.

It’s a high-growth area. Analysts at brokerage Zeus Capital estimate that Anexo’s revenue from this activity more than doubled from £5.1mn in 2021 to £11.9mn last year to account for 9 per cent of forecast group revenue of £135mn. It’s high-margin, too; Zeus estimates that this newer division delivered adjusted pre-tax profit of £5.3mn in 2023 at a profit margin of 45 per cent. On this basis, the housing disrepair claims division accounts for more than a fifth of group pre-tax profit estimate of £24.2mn.

To put that income stream into perspective, Zeus estimates that the credit hire business is likely to have made pre-tax profit of £5.2mn at a margin of 9 per cent on revenue of £59mn in 2023. Importantly, the average settlement period in a housing disrepair claim is seven to nine months, materially below that in a credit hire claim. Moreover, with housing disrepair revenue projected to rise to almost £15mn in 2024, the unit could be making pre-tax profit of £6.7mn, well above the contribution from credit hire and accounting for 29 per cent of the group’s profits.

Legal services

The balance of Anexo’s earnings come from its legal services business, which operates through Bond Turner, a Liverpool-based legal practice specialising in RTA claims (typically linked to or involving an element of credit hire), personal injury, and other professional/clinical negligence claims. The legal services division also arranges independent experts to support claims, such as expert witnesses, interpreters and consultants to substantiate medical reports.

In addition, Anexo has been pursuing emissions cases against the large German car manufacturers. Having settled a long-running class action against VW Group (on behalf of 12,000 claimants) last year, Anexo is representing another 12,000 claimants as part of a wider £1bn litigation action in the UK courts against Mercedes-Benz. Specifically, the claim is for fitting defeat devices to diesel vehicles to pass emissions tests. Although undisclosed for commercial reasons, the VW action is believed to have delivered a profit of around £7mn for Anexo.

A similar outcome in the Mercedes-Benz case is not an unreasonable assumption given the German carmaker has already lost its legal case in other international markets, including the US. An agreement on the matter could be reached by the year-end, and is not factored into analysts’ earnings estimates, which point towards a flat profit performance this year.

Bargain basement rating

Anexo doesn’t offer shareholders a dividend given that management is focused on driving down borrowings to de-risk the balance sheet. The reason for holding the shares is the potential for a narrowing of the deep share price discount to net asset value (NAV) given that Anexo’s book value of £154.6mn (131p) is 101 per cent higher than its market capitalisation of £76.7mn.

Bearing this in mind, as more investors cotton onto the capital recycling, the debt reduction programme and the changing mix in the group’s income stream, they are likely to reassess Anexo’s risk profile in a more positive light. For instance, Zeus’s 2024 year-end net debt estimate of £56.6mn could be slashed to less than £50mn in the event of a successful settlement with Mercedes-Benz on behalf of its 12,000 claimants.

Cutting borrowings transfers more of the economic interest in the entity from debt to equity holders, a factor that is certainly not reflected in the huge share price discount to book value nor the price/earnings (PE) ratio of 4.4. There is also the chance that 28.5 per cent shareholder DBay may attempt to buy out minority shareholders, as it has done recently by taking another investee company private, food manufacturer Finsbury Foods. Of course, it would need the support of the directors who own 35 per cent of the 118mn shares in issue, but that is entirely possible. Buy.