The cost of living crisis is proving a boon for this stock

The cost of living crisis is proving a boon for diversified financial services group H&T (HAT: 453p), the market leader in UK pawnbroking, part of the alternative credit market that is shunned by mainstream lenders.

The group’s pledge book surged by more than 50 per cent to £100.7mn last year, lifting the unit’s gross profit 42 per cent to £63.7mn, or 62 per cent of the group total. It has continued rising since then to an all-time high of £104mn. House broker Shore Capital has factored in a pledge book of £118mn at the 2023 year-end, a figure that H&T’s chief executive Chris Gillespie is comfortable with. He also points out that new borrowers surged 40 per cent last year to account for 13 per cent of pledges offered, highlighting the fact that H&T provides a valuable source of credit to individuals who lack the financial status to borrow from high-street banks.

Importantly, redemptions on the pawnbroking book remain high at 85 per cent and the median loan size is £185 at a loan-to-value ratio of 65 per cent, so credit risk is not being sacrificed as the lending book grows. Pre-owned watches account for 15 per cent of lending, and have a higher redemption rate, too, hardly surprising given that interest in the asset class has increased materially in recent years, both as a store of value and as an investment.

That trend can also be seen in H&T’s retail sales, which increased by a quarter to £45.2mn last year, a sixth of which were pre-owned watch sales. Last summer’s acquisition of Swiss Time Services, an independent watch centre that already serviced a large proportion of H&T’s watches prior to their sale, should open doors to expand watch sales even further.

Foreign travel exchange booming

It’s worth noting, too, that H&T’s foreign currency sales have fully recovered to pre-pandemic levels. The group converted £150mn of foreign exchange across 385,000 transactions at a gross margin of 3.8 per cent to boost gross margin 90 per cent to £5.7mn. The division only accounts for 5 per cent of group gross profit. Still, there is an opportunity to gain market share by broadening the product range to more exotic currencies (Thai baht and South African rand, for example), increasing the minuscule online offering, and promoting the click-and-collect service at H&T’s 267 stores. As more holidaymakers ditch Covid-enforced staycations in favour of international travel, there should be a natural tailwind behind the business even factoring in the tighter finances of consumers.

Low rating unwarranted

For the year ahead, Shore Capital pencils in 70 per cent higher pre-tax profit of £32.4mn on revenue up 19 per cent to £207.2mn, EPS of 57.4p and 23p a share annual dividend. On this basis, the shares are rated on a forward price/earnings (PE) ratio of 7.9, offer a prospective dividend yield of 5.1 per cent and are priced on a modest 10 per cent premium to forecast year-end NAV of 413p.

So, having delivered a 51.6 per cent total return since I included the shares in my 2022 Bargain Share Portfolio, I can see further scope for share price upside to Shore Capital’s 580p fair valuation based on a target 2023 PE ratio of 10. Buy.

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