This cash-rich financial firm is still on a modest rating

Middlesbrough-based financial services group Ramsdens (RFX: 257.5p) is firing on all cylinders, so much so that analysts at house broker Liberum Capital have upgraded their earnings forecasts for the fifth time in the past year. The upgrade cycle is underpinned by multiple profit drivers, not least of which is the ongoing cost of living crisis.

For instance, the group’s pawnbroking business has seen increased demand from both new and existing customers, helping the pledge book to increase 13 per cent year-on-year to a record high of £9.7mn. Management reports record high lending in both January and March, but with loan-to-value on plain gold less than two-thirds of the gold price and the median loan around £170, lending quality is not being sacrificed.

Pawnbroking accounted for a quarter of the group's gross profit in the half-year. It’s unlikely that demand will abate anytime soon now that tightening credit conditions are placing even more pressure on consumers as they face higher bills. The same is true of Ramsdens’ precious metals buying activities, as more consumers look to realise cash from unwanted gold jewellery and gold to take advantage of the high gold price and meet their short-term cash flow needs. In the latest half year, divisional gross profit increased 28 per cent to £4mn, or a fifth of the group total.

Gold and jewellery an inflation hedge

Moreover, with inflation well above the Bank of England base rate, and core inflation proving sticky, both investors and savvy consumers are looking to jewellery and high-end watches as a store of value. Demand for second-hand jewellery and premium watches, which accounts for 60 per cent of the group’s jewellery retail revenue, were key drivers behind the division’s 28 per cent higher gross profit in the latest six-month period. Growth in the online business and improvements in stock levels and product presentation are also driving up sales.

Ramsdens is also a play on the boom in foreign holidays as those consumers with cash return to the skies. Competition is less intense post-pandemic as many independent players failed when restrictions were placed on foreign travel. Ramsdens’ gross profit from exchanging foreign currency surged more than 41 per cent to £4.9mn, or a quarter of the group total, on a healthy maintained sales margin of 3.65 per cent.

On the upgrade

Although Ramsdens continues to outperform analysts’ earnings expectations, prompting another round of upgrades post results, Liberum note that the share price has tended to be reactionary to upward estimate revisions rather than pricing in upgrade expectations. This creates an opportunity to exploit the mispricing, hence why the share price has risen 13 per cent since early April (‘A financial company that keeps exceeding expectations’, 5 April 2023). There should be more upside to come.

That’s because even though the holding has produced a 65 per cent total return in my 2021 Bargain Shares Portfolio, the shares are still only rated on a forward price/earnings (PE) ratio of 10.9, offer a healthy 4 per cent prospective dividend yield and trade on a modest 1.65 times book value estimates. That’s a modest rating for a cash-rich company producing a post-tax return on equity of 17 per cent.

So, unless you believe the earnings upgrade cycle has run its course, and the fundamentals strongly suggest otherwise, the investment risk remains skewed to the upside. Liberum’s upgraded target of 290p (from 280p) could prove conservative. Buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com. The books are priced at £16.95 each plus postage and packaging (P&P) of £3.95 [UK], or both books can be purchased for the promotional price of £25 plus P&P of £5.75.