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S&U in the credit sweet spot

Lending conditions for the motor finance group have turned around rapidly
September 28, 2021
  • Sharp contraction in impairments
  • Interim dividend up 50 per cent

Motor finance specialist S&U (SUS) is back on track. Strong collections, a sharp fall in impairments and a better understanding of customer creditworthiness all clicked for the Solihull-headquartered in the six months to July. Broker Peel Hunt now expects to significantly raise full-year forecasts; hardly a surprise, given 73 per cent of its pre-tax profit estimate has already been booked.

Year-on-year comparisons are somewhat flattering. During the same period in 2020, the group was forced to hike loan loss provisions by £21.7m to £80.7m, meaning 22 per cent of total receivables were deemed at risk of default. One year on, provisions stand at 23.4 per cent of the loan book, but the rate of impairments has slowed markedly.

Indeed, a charge of £5.1m for the period compares favourably with the 2019 first half figure of £7.9m and suggests that the introduction of a flexible repayment portal, combined with enhanced affordability and credit checks, is helping to improve underwriting resilience.

Is rising inflation a threat? Finance director Chris Redford expects thinning disposable consumer incomes to add to pressure on loan book growth. In turn, this could have an indirect impact on credit quality, though the higher rates that come with S&U’s non-prime products provide something of a buffer.

FactSet-compiled consensus forecasts are for earnings of 187p per share for the year to January 2022, rising to 227p for the year after. That puts the stock on 13 times forecast earnings for the next 12 months, though looming upgrades suggest this 37 premium to the five-year average should soon reverse. Save for a serious deterioration in demand, the group’s strong track record should continue. Buy.

Last IC View: Hold, 2,228p, 30 Mar 2021

S&U (SUS)    
ORD PRICE:2,890pMARKET VALUE:£351m
TOUCH:2,850-2,890p12-MONTH HIGH:2,950pLOW: 1,595p
DIVIDEND YIELD:3.5%PE RATIO:14
NET ASSET VALUE:1,555pNET DEBT: 61%
Half-year to 31 JulTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
202042.86.3141.922.0
202142.819.913333.0
% change-0.03+216+218+50
Ex-div:28 Oct   
Payment:19 Nov