A winner from the cost of living crisis

H&T (HAT: 427p), a diversified financial services group and the leader in UK pawnbroking, issued a bullish pre-close trading update ahead of its interim results, which has underpinned a major share price rally (‘A gold plated investment opportunity’, 7 July 2022). It has some way to run given the scale of this week's post results earnings upgrades, and the ongoing strong momentum across the business.

In fact, analyst Gary Greenwood at house broker Shore Capital raised his full-year pre-tax profit estimate by 18 per cent to £18.7mn, implying 75 per cent year-on-year growth in earnings per share (EPS) to 36.5p. Moreover, with H&T’s half-year pledge book of £85.1mn well above pre-pandemic levels (£72mn), and daily lending volumes 40 per cent higher, too, he believes the pawnbroking book could hit £97mn by the year-end as the cost of living crisis deepens. H&T chief executive Chris Gillepside is comfortable with these estimates, and points out that redemption rates are above historic levels (around 85 per cent), and impairments are minimal. Pawnbroking accounted for over 60 per cent of gross profit in the six-month period, so is a major income generator.

A much higher likely year-end closing pledge book supports an even larger upgrade to Shore Capital’s 2023 earnings estimates, too, hence why Greenwood upgraded his 2023 pre-tax profit and EPS estimates by 37 per cent to £28.8mn and 56.3p, respectively. On this basis, expect a 25 per cent higher annual dividend per share of 15p – in line with the 25 per cent hike in the interim pay-out to 5p – rising to 22.5p in 2023. This implies the shares are rated on PE ratios of 11.6 (2022) and 7.5 (2023) and offer attractive prospective dividend yields of 3.5 per cent (2022) and 5.3 per cent (2023).

Source: London Stock Exchange

Importantly, loan-to-value ratios are below 65 per cent on the pledge book which mitigates bad debt risk, and unredeemed pledges can be sold through H&T’s 265 store estate or gold content scrapped. A high sterling gold price is proving attractive for gold purchasing, too. Gross profit from this activity more than doubled to £2.8mn in the first half, and at a higher margin, as customers sold their jewellery to mitigate the impact of inflation on their disposable income.

Gillespie notes that H&T’s strong focus on pre-owned jewellery is a differentiator. This part of the high end discretionary retail market remains strong, and offers a ‘store of value’ to clients, some of whom can use their purchases as collateral on future pledges. Also, the group continues to benefit from greater investor interest in luxury watches as an asset class, the segment accounts for 15 per cent of the group’s retail sales. The recent acquisition of Swiss Time Services, an independent watch centre that services a large proportion of H&T’s watches prior to their sale, complements this activity.

H&T’s shares have delivered a 42 per cent total return since I included them in my 2022 Bargain Share Portfolio, and hit my 425p price target post results. However, the scale of the upgrades coupled with robust prospects for H&T’s pledge book as the cost of living crisis deepens, warrant raising my target to 500p, equating to a forward PE ratio of 9 for 2023. Interestingly, H&T’s share price has broken out above the 2011 and 2019 record highs (415p), so there is no technical overhead resistance. Buy.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.

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