H&T Group – significantly oversubscribed fund raise increases broker’s estimate

A week ago the UK’s largest pawnbroking business, the H&T Group (LON:HAT), announced that it was looking to raise up £16.9m by way of a placing of new shares with both Institutional and Private Investors.

The issue price of 425p a share was about 4.3% lower than the closing price the day before the announcement.

The use of the new funds

The group deemed it right to raise fresh funds right to help it to grow its pledge book and cover the additional costs in its strategic programme to open another 20 new stores in the next year or so.

“The business intends to target a sustainable ROE in the mid-teens through the cycle. The deployment of the capital raised will be accretive to EPS in the financial year after the Capital Raise and the capital raised will generate returns above its cost of capital.”

Strong demand for its loans

It plans to spend about £10m on its pawnbroking loans book, helping it to meet the significant demand that has come about as banks and lenders of alternative finance seem to have drifted away from such business in the last couple of months.

The company stated that it was experiencing strong pledge book demand and has had a growing requirement month on month over the last year – growing from £50.2m at end June 2021 to £89.6m as at 31 August this year.

“The Directors believe that the strong demand is a consequence of two main factors. First, a reduction in the number of lenders offering small-sum short-term credit and second, the squeeze on disposable incomes as a consequence of rising inflation. This demand is not expected to abate in the short to medium term.”

Growing sales in its retail side too

The balance £6m will be used in opening new shops in areas such as Wales and the West of England, in the North-West, in Lincolnshire and in the East of England.

There is also opportunity to increase its retail density inside London and other key towns.

“The retail division has had consistently strong sales through the summer. The market for pre-owned jewellery and watches remains an attractive growth segment of the overall jewellery market. Store presence is critical to support growth of the pledge book and footfall supports revenue from ancillary products, particularly retail sales.”

Current Trading looking good

The group has stated that it expects to deliver its 2022 results in line with market expectations.

On its pawnbroking side, demand has continued to build with August being declared a record month for its pledge lending.

Its retail sales remained consistently strong through the summer, with sales of new items representing 18% of total sales.

Gold purchasing remained buoyant with the high sterling gold price continuing to support scrap margins.

And finally, the return of overseas travel, particularly over the summer, continued to drive growth for its foreign exchange business, with its revenues maintained at double the levels of 2021 – which is very encouraging.

The Capital Raise was a total success

Within the day after the announcement the group declared that it had been successful in raising the £16.9m gross proceeds.

Some 3,925,050 shares went to the institutions, while retail investors took up 61,357 new shares – all at 425p a share.

The whole raise, which was significantly oversubscribed, increased the total number of shares in issue by 9.99%, up to 43,850,484.

Broker’s View – capitalising on growth opportunities

Analyst Gary Greenwood, at the group’s NOMAD and Broker Shore Capital, on the back of the new funding and trading update, upgraded his estimates for 2023 and 2024.

For the current year to end December he is going for the group’s pledge book to increase to £100.4m, then on to £117.4m for 2023, with £123.3m in 2024.

Those increases will help overall revenues for the group to rise to £163.7m this year, £193.7m next year and £208.5m the year following.

This growth Greenwood estimates will help to improve the company’s pre-tax profits to £19.1m this year, then £32.6m and £39.2m respectively.

For those three years he sees earnings of 36.3p, then 57.9p and up to 69.6p in 2024.

In the same period the dividends are due to rise from 15.0p per share this year, to 23.0p next year and 28.0p in 2024.

Against the backdrop of these estimates Greenwood has increased his ‘fair value’ for the group’s shares from 470p to 580p.

My View – bold, impressive, a real winner

To come to market and raise almost £17m when equities generally were on the wane, was both bold and impressive.

But it does actually show investors that the group’s management was confident enough in its trading prospects to be able to get away with such an issue.

And then to do it ‘significantly oversubscribed’ was wonderful.

It shows to me that H&T Group shares are a thumping-good purchase right now.

If you have been holding them since early June, when I first profiled the company, then just pat both yourself and your coffers for being so right.

Clearly, to me anyway, these shares must now be seen to head upwards to the 500p level before some profit-taking eases them back and then presses them even higher still.

This really is a cracking ‘situation stock’ that is defying the general economic and market backdrop and it is firing on all cylinders.

At the current 448.5p the almost £200m market capitalised group is going to prove itself to be a ‘real winner’.

(Profile 06.07.22 @ 332.5p set a Target Price of 400p*)

(Asterisks * denote that Target Prices have been achieved since Profile publication)