H&T Group – Trash or Treasure?

“Half a pound of tuppeny rice,

Half a pound of treacle,

That’s the way the money goes,

Pop goes the weasel!”

I am sure that none of my readers were around when that ditty was being sung regularly in the 1850’s.

Now very much a nursery rhyme for children, it was said to have come from a 17^th century song.

Rather than ending up in the ‘poor house’ the needy would walk around the streets to their local pawnbroker to ‘pop’ anything of value, even including clothes, shoes or wedding rings.

To ‘pop’ was another word for pawn, while your ‘weasel’ was your coat, from rhyming slang ‘weasel and stoat’.

Literally anything that had a value was considered as an item for pawning.

Charles Dickens regularly wrote about pawnbrokers in his various stories.

In the East End of London, the slang term ‘Uncle’ was another way of describing the local pawnbroker.

As many pawn shops as pubs

In the 1800’s there were almost as many pawnbrokers’ shops as there were public houses.

Pawnbroking in its various forms is one of the oldest businesses, even on a global scale.

The word pawn derives from the Latin word pignus, which was ‘to pledge’.

There have been centuries of lending over the last 3,000 years, from the ancient Chinese who advanced money for short periods to the peasants, through to the ancient Greeks and Romans, right up to the Normans and the Jews who brought their methods of lending money into the UK in the late 1100’s.

A load of balls

In Italy, the Lombards in the 1600’s, were led by the powerful Florence-based Medici family of merchants, who were reputed to have had a family crest of three balls, born from a legend that one of their employees killed an enemy using three bags of rocks.

Another explanation of this theme was that Saint Nicholas of Bari gave out three bags of gold to the young daughters of an impoverished father who was about to sell his daughters into prostitution.

Instead, Saint Nicholas gave the daughters their dowry, thereby saving their futures.

Pawnbroking shops have subsequently been recognised by the fixed sign of three golden balls above the outside of their premises.

There were some 1700 pawnbrokers in the UK by the mid-1800’s.

Over the years that number has been eroded, due to the imposition of laws governing the lending of money and the taking of pledges.

Today there around 190 pawnbroking businesses in the UK.

My Interest in Pawnbroking

In late 1987 I started to build up a personal shareholding in a company called Harvey & Thompson, a pawnbroking company, then under the control of members of the Cayzer shipping family and their associated investors.

I had been looking at it for some years, I visited the company and became excited by the arithmetic growth potential of the business.

Eventually I built up a 15% stake in the company, which was later sold off at a near trebled profit a couple of years later.

I just love the way that pawnbrokers do their business, always advancing money against assets that are often worth three times the sum lent.

For their customers an attraction to their lending is that pawnbrokers do not need to do credit checks on those to whom they advance funds. They only offer to do so backed by the value of their customer’s ‘pledge’.

For instance, items of jewellery are valued on a ‘third party’ basis – in other words what would that item get at a jewellery auction.

In a very basic description, when you leave your goods with a pawnbroker, they must give you a receipt known as a ticket.

The pawnbroker must keep the goods for at least six months, but you can get them back at any time by redeeming your ticket by paying off the loan plus interest.

Interest rates can come out at over 150% per annum, but remember the pledges are generally for just six months, although the average time for a pledge is said to be around four months.

The pawnbroker is safe in the knowledge that if you don’t come back to redeem your pledge, he does at least have your goods to sell and settle off his account.

The Business Today

The largest firm of pawnbrokers in the UK is the H&T Group (LON:HAT).

H&T Pawnbrokers began serving communities in London in 1897. Since then it has expanded to become one of the oldest and leading pawnbrokers in the UK.

In May 2006 the company floated on AIM, since when it has accelerated its development by adding new products and services, expanding the store network and developing a complete online service.

Today the £133m market capitalised company provides a range of simple and accessible financial products tailored for a customer base who have limited access to, or are excluded from, the traditional banking and finance sector.

As part of its development the group has diversified its product portfolio, which now includes pawnbroking, unsecured lending, jewellery retail, cheque cashing, Western Union money transfer and Foreign Exchange.

The Business Parts

The company, which now has some 256 stores as well as a very good online service, operates through six segments: pawnbroking, gold purchasing, retail, pawnbroking scrap, personal loans and other services.

Its Pawnbroking (36.7% of the group’s 2021 sales figure of £122m) is engaged in providing secured loans against collateral (the pledge).

Its Retail segment (29.7% of sales) is engaged in retail sales of gold and jewellery, and the retail sales are forfeited items from the pawnbroking pledge book or refurbished items from its gold purchasing operations.

The Gold Purchasing segment (16.8%) is engaged in buying jewellery directly from customers through its stores.

Its Pawnbroking scrap segment (9.0%) consists of gold scrap sales of its inventory assets other than those reported within gold purchasing.

The group’s Other Services represents 4.5% of group sales, while Personal Loans accounts for 2.3%, with others making up just 1.0%.

The Equity

There are some 39.86m shares in issue.

The larger holders include Close Asset Management (10.09%), FIL Investment Advisers (UK) (9.98%), Camelot Capital Partners (6.68%), Octopus Investments (6.47%), Artemis Investment Management (5.83%), Fidelity Management & Research (5.57%), Hargreaves Lansdown Stockbrokers (2.87%), Canaccord Genuity Wealth (2.51%), Henderson Global Investors (2.30%) and Abrdn Investment Management (1.63%).

Latest Deal

Earlier this week the group announced the earnings enhancing acquisition of Swiss Time Services for £4.3m cash.

STS is a leading independent watch servicing and repair centre business, with whom H&T has had a long-time relationship.

It is estimated that the purchase in its first year could well add a £0.5m boost to the group’s bottom line.

Trading Update

On Monday of this week the group published a Trading Update stating that the first six months of the current year have shown the group gaining strength after the fall-back last year due to Covid.

It reported that demand for pledge lending had continued to gather momentum in the first half of the year.

The group’s pawnbroking pledge book at the end of June 2022 was £84.2m, compared to just £48.3m at the same time last year.

Apparently, growth was seen across the group’s customer base and in all geographies.

In fact, pledge lending was at record levels, and growing month on month.

Impressively lending volume is stated as being over 40% above pre-pandemic levels.

The group reported that its average loan sizes, its loan-to-value ratios and its redemption rates have all been maintained.

The company, which has a strong retail sales side to its business, has seen consistently strong trade and is in line with expectations.

The gold purchasing part of the group’s activities, has been buoyant, supported by a stronger gold price helping to drive both volumes and improved margins.

Revenues from the group’s foreign currency side, have more than doubled in the first half year, as international holiday travel returns, with transaction volumes back close to pre-pandemic levels.

With the Update Chris Gillespie, the group’s CEO, stated that:

“I am delighted with the progress we have made in the first half of 2022, and the momentum with which we enter the second half of the year.”

We will see the group reveal more about its trading and its prospects when it reports its interim results on 9 August.

Brokers View

In the latest note on the group by analyst Gary Greenwood, at Shore Capital, the group’s NOMAD and broker, he believes that in the current environment the investment case for the stock is compelling.

He sees the cost-of-living crisis likely to support demand, with margins in gold purchasing improving, and as foreign travel resumes he sees that demand for its exchange services will rise in reaction.

Ahead of the interims, he goes for the full year to end December to report pre-tax profits 58% ahead at £15.8m, worth 32.2p (20.8p) per share in earnings, covering a 14.0p (12.0p) dividend per share.

Going into 2023, Greenwood looks for £21.0m profits, 40.8p earnings and a dividend of 18p a share.

Looking even further ahead in 2024 he estimates £25.8m profits, 49.3p earnings and a 22.0p dividend per share.

My View

Those Shore Capital figures could well be upgraded in August.

The company clearly states that the UK alternative credit market is not adequately serviced by the mainstream lenders and H&T fills a gap by providing a valuable source of credit to individuals in that part of the market.

I get the strong feeling that a big recovery is now underway for the H&T Group.

Its shares, which hit 381.5p in May this year, could well rise above that peak before the year is out.

They closed at 332.5p last night, some 11p up after the Trading Update.

At that level the shares are trading on only a 10.3 times current year earnings and yielding around 4.2%.

And they are on prospective earnings of 8.1 times with a 5.4% yield.

These shares have excellent upside attractions.

I now set an easy 400p Target Price on the alternative credit group’s shares.