Bargain Shares: Priced to motor

Liverpool-based Anexo (ANX:130p), 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, has delivered a better than expected earnings recovery than I had anticipated when I included the shares, at 136.9p, in my market beating 2021 Bargain Shares Portfolio.

In fact, following a robust pre-close trading update in January, Panmure Gordon pushed through 11 per cent plus earnings per share (EPS) upgrades for the 2021 to 2023 forecast period. More importantly, the strong momentum shows no sign of abating. In fact, chairman Alan Sellers says the opportunities within the group’s credit hire division “have never been so strong”, and that’s after the average number of vehicles out for hire increased by a fifth to 1,834 last year. Currently, around 2,000 vehicles in the fleet are being hired out.

The withdrawal of several competitors from the market and the introduction of the Civil Liabilities Act, which severely curtails the ability of personal injury solicitors to recover substantial legal costs, has certainly played into Anexo’s hands. Moreover, by offering both credit hire and legal services, Anexo is exploiting a competitive advantage over pure credit hire companies (who lack the in-house capacity to litigate a customer’s claim), and solicitors (who lack a vehicle fleet to offer to motorists).

True, a decline in road usage during national lockdowns still had an impact, but less so on Anexo given that a large number of credit hire customers are classed as key workers, including couriers (who have been extremely active throughout the pandemic) as well as health professionals, teachers, nursery staff, emergency workers and supermarket personnel. In fact, despite the lockdown in the first half of 2021, Anexo’s credit hire division provided vehicles to 10,265 individuals, a 36 per cent year-on-year increase.

The group’s focus on motorcycle credit hire is worth noting, too. That’s because take-on costs are significantly less than for cars, but claims have a similar value, a positive for the working capital cycle and return on investment. Statistics show that motorcyclists are particularly vulnerable to personal injury in non-fault accidents. Investment in new cases explains why year-end net debt increased by half to £62mn, or two times current year operating profit estimates, despite cash collections rising by a fifth to £119mn. The group's post-tax return of 16.5 per cent on equity warrants the investment. 

Note One: Simon recommended tendering 30 per cent of holdings in Vietnam Holdings at US$4.4528 (322.3p) a share, and tendering 3.9 per cent in the excess application ('Exploiting a tender offer', 4 August 2021), with a view to buying back the tendered shares at the lower market price (284p offer price on 13 and 14 September 2021) when the cash distribution was made during the week of 13 September 2021. Total return reflects these transactions which have reduced the entry point to 188.3p a share.

Source: London Stock Exchange. Latest prices at 2pm on 11 May 2022.

Interestingly, Anexo has been tapping new income streams, having invested £1.7mn in 2,000 cases last year for tenants making claims against landlords under the Homes (Fitness for Human Habitation) Act 2019. The Act came into force to make sure that rented houses and flats are fit for human habitation. The unit delivered a tenth (£2.6mn) of group pre-tax profit, having settled a quarter of those cases with 1,500 still ongoing. Investment in new housing claims will be doubled this year, a sensible decision given the bumper profits to be made and the short working capital cycle to settlement.

Anexo is also starting to actively source claims against Mercedes Benz in relation to the German group’s emission scandal. Sellers says that the market could be double that of VW, another positive for windfall gains. Analysts expect Anexo’s claim against German carmaker Volkswagen on behalf of 13,000 motorists (who suffered in the emissions scandal) to reach settlement well before the year-end. Anexo could potentially earn £16mn of operating profit when these cases are settled, a hefty return on its £4.5mn investment to date. This is not embedded in Panmure’s current year forecasts which point to group pre-tax profit and earnings per share (EPS) rising a fifth to £29mn and 19.9p, respectively, on six per cent higher revenue of £125mn. Post results, the brokerage also raised their 2023 EPS forecast again by a further 10 per cent to 22.6p.

On this basis, the shares are rated on a current year forward price/earnings (PE) ratio of 6.5, offer a prospective dividend yield of 1.4 per cent and are priced in line with year-end net tangible asset estimates of 129p a share. A cash windfall from settlement of the VW claims would not only deleverage Anexo’s balance sheet, but is an obvious catalyst for an overdue re-rating. Buy.

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