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A gold-plated investment opportunity

It's not often investors fail to spot a gold-plated earnings upgrade opportunity, but a diversified financial services group offers exactly that, having issued a bullish pre-close trading update ahead of next month’s interim results, the implications of which have been completely missed.
July 7, 2022

•    Record pledge book 40 per cent above pre-pandemic levels
•    Earnings accretive acquisition of leading independent watch servicing and repair centre
•    Potential for 15 to 20 per cent earnings upgrades when company releases results on 9 August

It’s not often investors fail to spot a gold-plated earnings upgrade opportunity, but H&T (HAT: 345p), a diversified financial services group, offers exactly that. The leader in UK pawnbroking issued a bullish pre-close trading update ahead of next month’s interim results, the implications of which have been completely missed.

Firstly, demand for pledge lending continues to gain momentum, so much so that H&T’s pawnbroking book has increased by 26 per cent to £84.2mn this year and is above the year-end £83mn forecast embedded into estimates of house broker Shore Capital. Moreover, there is no sign of momentum slowing with current volumes at record levels and 40 per cent above pre-pandemic levels. As the ongoing cost-of-living crisis starts to impact even more cash strapped consumers, then lending in this niche market segment can only increase further. Shore Capital analyst Gary Greenwood now expects the pledge book to be nearer to £100mn at the year-end.

Importantly, loan-to-value ratios are prudent, redemptions rates are solid, and the sterling gold price remains high – up 11 per cent year-on-year and only seven per cent shy of the all-time high – a factor that is also supporting buoyant gold purchasing volumes, and at higher profit margins. In addition, the withdrawal of rivals from the unsecured high-cost credit space is driving more borrowers to pawnbrokers instead.

Secondly, H&T has announced the smart strategic acquisition of Swiss Time Services, a leading independent watch servicing and repair centre that already services a large proportion of the group’s watches prior to their sale. The watch segment accounts for 12 per cent of the pledge book and 15 per cent of retail sales, and is a growing part of H&T’s business. By bringing the activity in-house, H&T can boost margins and offer repair services to its existing client base. Greenwood expects the acquisition to contribute £0.5mn pre-tax profit in its first full-year, a healthy return on the £4.3mn purchase price.

It’s worth noting that in-store retail sales have also been “consistently strong”, buoyed by greater interest in high-end watches as an asset class, improved inventory levels and smarter websites. Furthermore, as millions of holidaymakers are taking to the skies once again, foreign currency exchange volumes have boomed and are back close to pre-pandemic levels.

Greenwood provisionally expects to upgrade his current year earnings per share estimate of 32.2p by 15 to 20 per cent, implying 78 to 85 per cent year-on-year earnings growth. Moreover, expect an even greater upgrade to 2023 EPS estimates of 40.8p, reflecting the higher pledge book at the start of 2023 and a 12-month contribution from the acquisition. On this basis, the shares trade on forward PE ratios of 9 (2022) and 7 (2023), and offer prospective dividend yields of 4 and 5.2 per cent, respecttively.

H&T’s share price has risen 13 per cent since I included the shares in my 2022 Bargain Share Portfolio, and I upgrade my target from 400p to 425p. Buy.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards. He will be on annual leave until July 18.

 

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