Middlesbrough-based financial services group Ramsdens (RFX:205p) has delivered record full-year pre-tax profits of £10.1mn, having upgraded guidance no fewer than four times during the financial year. Perhaps investors were expecting another beat, hence the subdued 5 per cent share price markdown post results. It’s a harsh reaction.
For starters, the group’s pawnbroking business looks set for another solid performance in the new financial year, having seen higher demand from both new and existing customers, which boosted the closing pledge book by a fifth to a record high of £10.3mn. New customer volumes increased by 11 per cent and repeat business remained high at 90 per cent, partly due to weaker consumer credit competition from peers such as NSF, Morses and Amigo, which are all facing company-specific or regulatory issues. Average loan size is on the rise, too, up from £303 to £325, a reflection of inflationary pressures on customers.
Moreover, having delivered 33 per cent higher annual gross profit of £10mn, or 22 per cent of the group total, last year’s loan book growth should deliver higher profitability in the new financial year given the lag between the interest earned and the recognition of the loan in the pledge book. Since the financial year-end, the pawnbroking book has increased to another record high of £10.6mn.
Ramsdens’ counter cyclical offering undervalued
It’s worth noting that the combination of the uncertain geopolitical climate and expectations that the US central bank will start cutting interest rates this year are all supportive of the US dollar-denominated gold price. Indeed, the gold price remains close to record highs, thus offering potential customers greater collateral to pledge. Many will need to do just that in the coming year given the challenging outlook for the UK consumer.
This backdrop is also positive for Ramsdens’ precious metals buying and selling service, which increased last year’s gross profit by 38 per cent to £9.2mn, or a fifth of the group total, on 48 per cent higher revenue of £23.5mn. Jewellery purchased is either sold through Ramsdens’ network of 165 stores and online, or it is smelted and sold to a bullion dealer for its intrinsic value. A high gold price is not only supportive for the margin earned from this business line, but it should attract more customers looking to offload unwanted jewellery to fund their short-term cash flow needs. Post-period-end, precious metal gross profit has increased 10 per cent year-on-year.
Retail and currency exchange deliver growth
In more challenging UK economic conditions, it may seem odd that Ramsdens’ jewellery retail business is performing so well. Divisional gross profit surged 16 per cent to £12mn, or a quarter of the group total, on 23 per cent higher revenue of £33.5mn. The outperformance was achieved mainly by investing in stock levels to improve the product offering, better stock presentation and online growth. In fact, internet sales increased by 70 per cent to £6.7mn to account for 20 per cent of divisional sales.
For instance, although the group’s best-performing branches for watch sales have 120 watches in store, there are around 2,000 watches available on the company’s retail website for customers to browse and buy. The internet offering is highly scalable, too, so is benefiting from the £4.7mn investment in stock made last year, the primary reason why group net cash declined from £8.8mn to £5mn. It’s an investment that continues to deliver strong returns, as highlighted by the 5 per cent rise in divisional gross profit in the first quarter of the new financial year.
Admittedly, trading in the group’s foreign currency exchange business was slower than anticipated last summer. However, this needs to be put into perspective. The unit still increased volumes by 18 per cent to 0.9mn transactions with an average of £446, or 11 per cent ahead of pre-pandemic levels. Gross profit margin of 3.3 per cent remains higher than pre-pandemic levels, too, hence the 8 per cent rise in divisional gross profit to £13.6mn (30 per cent of group total), which was 4 per cent higher than pre-pandemic levels. The launch of a new multi-currency card at the end of last year should enable Ramsdens to capture more of its customers' total holiday expenditure, too.
Another year of growth
For the year ahead, house broker Liberum Capital is embedding 6 per cent annual growth in what could prove to be conservative-looking revenue forecasts of £89mn. On this basis, expect pre-tax profit to edge up by 4 per cent to another record high of £10.5mn and flat earnings per share (EPS) of 24p. After factoring in further investment in stock levels, the pledge book and stores, net cash should rise modestly to £5.2mn and enable the board to declare a hike in the payout to 11p a share.
It means that Ramsdens’ shares are rated on a lowly price/earnings (PE) ratio of 8.5, offer a prospective dividend yield of 5.4 per cent and trade on 1.3 times book value despite boasting a heavily asset-rich balance sheet. That’s a low rating for a company that has just delivered a post-tax return on equity of 17 per cent. It’s worth flagging that Ramsdens is forecast to deliver growth even after absorbing the 10 per cent increase in the national living wage in May 2024 and £0.4mn higher energy costs this year, a reflection of the strength in its underlying businesses.
Ramsdens’ shares are trading around the level of my last buy call (‘Six micro-cap shares worth buying, 9 November 2023), having delivered a 50 per cent total return in my 2021 Bargain Shares Portfolio, during which time the FTSE Aim All-Share TR index has shed 35 per cent of its value. At the current rating, they are priced for further outperformance. Buy.
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