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Questor: a lender the banks won’t compete with at a valuation that catches the eye

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cars on forecourt - Oli Scarff/Getty Images
cars on forecourt - Oli Scarff/Getty Images

A huge drop in loan impairments, sensible lending policies and strong collections all mean that specialist finance provider S&U is making the most of an upturn in demand for both cars and property refurbishments.

Admittedly, the share price is not responding – it stands almost a fifth below last summer’s highs – but the valuation looks attractive and we have some protection against losses courtesy of an entry price in April 2019 that was some one third below current levels.

The share price slide in recent months may reflect concerns over the squeeze put on living standards by inflation and the prospect of higher interest rates and how both may affect people’s willingness and ability to borrow.

The role played by a £33m fall in the company’s bad loan losses in boosting profits may also prompt some investors to wonder whether the bumper earnings in the year to January can be immediately repeated. Right now analysts are pencilling in a drop in pre-tax income for the coming 12 months to £39.7m from £47m.

However, a 15pc increase in receivables, the biggest in five years, shows that the company is already laying foundations for future growth. Indeed, receivables stand at a record high of £323m, to suggest that S&U continues to provide a valuable service and generate fresh momentum in its two niches, both of which the big banks appear to be content to leave alone.

Through its Advantage Finance arm, the Solihull-headquartered firm provides non-prime loans for cars, while the fledgling Aspen Bridging operation offers property loans for individuals and commercial borrowers who wish to buy or refurbish an asset.

Some investors may share the big banks’ reticence to get involved if they have concerns over Britain’s economy and its car and property markets.

A downturn in the economy and any associated jump in unemployment could jeopardise customers’ ability to repay their loans, while the combination of higher interest rates and inflation is starting to make its presence felt at Aspen Bridging, where management can see a slight cooling in demand.

However, S&U manages risk in a disciplined manner, as you would expect of a company that dates to 1938 and can point to three generations of management by the founding family, which still has a major shareholding.

Moreover, the market for nearly new used cars continues to boom amid a shortage of new vehicles and Aspen is building a strong loan book and future pipeline even as it approves only a relatively small percentage of applications.

S&U is well placed to capitalise. The company can borrow up to £180m from its own lenders and with just £114m of those facilities already deployed the firm has a further £66m available for growth.

Finally, the stock’s valuation does catch the eye. The shares trade on less than 10 times historic and forecast earnings and offer a dividend yield, based on past divis, of more than 5pc.

Income seekers should note that S&U traditionally pays two interim dividends a year, one in November and one in March, followed by a final payment in July.

Stick with S&U.

Questor says: hold

Ticker: SUS

Share price at close: £24.20

Update: AG Barr

According to last week’s full-year results, profits at soft drinks maker AG Barr now exceed pre-pandemic levels.

However, the share price does not and as the maker of Irn-Bru, Funkin and Rubicon drinks continues to generate cash and once more offers regular dividend payments, the shares appear to merit continuing support, even if we are still slightly in the red following our initial analysis of the stock in August 2019.

A forecast price-to-earnings ratio of 17 and a forecast yield of 2.8pc, based on consensus analysts’ forecasts, represent a premium and a discount respectively to the wider UK market.

But the company has a net cash pile of £68m, generates a high-teens percentage return on capital and nurtures the sort of popular brands that bring pricing power, a valuable characteristic at a time when galloping inflation is a major challenge for many companies.

Hold on to AG Barr.

Questor says: hold

Ticker: BAG

Share price at close: 530p

Russ Mould is investment director at AJ Bell, the stockbroker

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

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