Time Finance ups guidance and trades on a 17% discount

Time Finance (TIME:39.5p), an alternative provider of finance to the high-street and challenger banks, has upgraded earnings guidance for the second time since November 2023. The Bath-based group provides three main finance products – invoice finance, asset finance and loan finance – to more than 10,000 small and medium-sized enterprises (SMEs) for their day-to-day working capital requirements and to grow their businesses over the longer term.

Scaling-secured lending activities and transaction size increased the lending book by 24 per cent to a record high of £188mn at the 30 November 2023 half year-end, and the business is well funded to hit its June 2025 lending target of £230mn. Importantly, delinquency debt levels remain static at around 6 per cent of loan receivables, reflecting the focus on lending to more established and credit-worthy businesses.

Accelerated profit growth

The operational gearing of the business is such that profit growth outpaces revenue growth by some margin in a positive revenue cycle as an increasing proportion of additional gross profit earned on new lending converts into operating profit. To put the upgrade cycle into perspective, only six months ago, house broker Cavendish was forecasting 19 per cent growth in current-year statutory pre-tax profits to £5mn on 9 per cent higher revenue of £30mn.

However, having upgraded guidance in November 2023, the board has done so again and is now guiding investors to expect pre-tax profit of not less than £5.7mn (upgrade from £5.4mn and implying 36 per cent annual growth) on revenue of £31.5mn (upgrade from £30.8mn and implying 14 per cent annual growth) in the 12 months to 31 May 2024. On this basis, the shares are rated on a modest forward price/earnings (PE) ratio of 8.4 (2024) and 7.7 (2025) and well below tangible net asset value estimates of 42p (2024) and 47.5p (2025).

So, having suggested buying the shares, at 26.5p (‘Alpha Research: Business is booming for this underrated lender to SMEs’, 18 August 2023), and reiterated that advice, at 37.5p, (‘Tap into this bargain-priced SME lender’, 25 January 2024), I see upside to my 50p target ahead of the third-quarter trading update on 26 March 2024. Buy.

■ Special offer. Simon Thompson's books Successful Stock Picking Strategies and Stock Picking for Profit can be purchased online at www.ypdbooks.com at the special discounted price of £5 per book plus UK P&P of £4.95, or £10 for both books plus UK P&P of £5.75, subject to stock availability.

They include case studies of his market beating Bargain Share Portfolio companies outlining the characteristics that made them successful investments. Simon also highlights other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Full details of the books’ content can be viewed on www.ypdbooks.com