Secure Trust Bank – high gearing to UK economic revival

Secure Trust Bank is an established, well‐funded and capitalised UK retail bank with a 68-year trading track record, and it should do well as the UK economic revival takes hold.

I have been watching this banking company for some years, especially after I profiled Arbuthnot Banking way back in March 2019. It used to be a significant holder of Secure Trust Bank (LON:STB) shares before various disposals.

Then, in late January this year, I had started to write a profile on STB, when its shares were just around the 950p level. However, I was diverted by another company’s merits.

Now at 1,210p, you might chastise me reckoning that I missed the boat – but I haven’t, nor have you, because there is still masses of upside in going for this specialist banking company’s shares.

A good track record

Secure Trust Bank is an established, well‐funded and capitalised UK retail bank with a 68-year trading track record. 

Its head office is in Solihull, in the West Midlands, from where it controls the activities of its near 1,000 employees. It has another seven offices around the UK – in Cardiff, Rotherham, Reading, Manchester, London, Birmingham and Leeds.

The group has a diversified lending portfolio, which currently focuses on two main sectors: Business Finance, through its asset finance, commercial finance divisions and real estate finance; and Consumer Finance, through its motor finance, retail finance, debt collection and consumer mortgages divisions.

The group’s loans and advances to its customers total around £2.4bn, while its customer deposits total some £2bn and its total customer base was well over 1.5m.

Recently announced results

Two weeks ago, the group announced its 2020 finals showing that it did fairly well, considering the hits that it took to its various business activities due to Covid-19.

The figures to end-December showed operating income barely changed at £166.1m (£165.7m). Pre-tax profits, which were expected to have come in at less than half of the 2019 £38.7m, only fell to £20.1m. Earnings were down at 85.2p per share (180.2p), while the dividend was almost halved at 44p (87.2p).

Last year, total new business lending volumes dropped 27.1% to £1.03bn (£1.41bn).

Prima facie awful but…

So, on the face of it the figures look poor, but in fact they came in considerably better than many in the market had been expecting.

Research house Edison have reassessed their numbers and are now looking for current year income at £165.7m and pre-tax profits rising 36% to £27.4m, worth 115.2p in earnings and sufficient to pay out a 46.1p dividend.

Going forward to 2022, they go for £190.8m in income, £41.5m of profits, earnings of 175p and a 70p dividend per share.

Last Friday night the shares closed at 1,210p, which puts them out on only 10.5 times current year earnings and on just a mere 6.9 times for the next year.

Both Edison and Peel Hunt have much higher price objectives

Accordingly, Edison have computed a fair value for Secure Trust Bank shares at 2,163p – which is quite appealing.

Analyst Robert Sage at brokers Peel Hunt considers that the company has enough working capital to exploit emerging opportunities and was impressed that it had maintained stable revenues despite the stormy conditions. 

He has now made the group’s shares a ‘buy’ while increasing his price objective to 1,430p. 

Going forward to 2023 and it looks even cheaper

I have seen estimates for the year to end-December 2023 showing a £209m income and £56.9m pre-tax profits, worth 237p per share in earnings and paying a dividend of 83p per share. 

Undoubtedly such estimates will be amended in due course, but they do show significant faith in the ability of this specialist banking group’s management to cope with hassles and drive the company back towards its growth course.

Capitalised at only £225m

There are some 18.63m shares in issue. 

The larger professional holdings include Threadneedle Asset Management (17.3%), Invesco Asset Management (9.67%), Unicorn Asset Management (8.16%), SAC Venture Investments (8.11%), Wellington Management (6.37%), FIL Investment Advisors (6.15%), Arbuthnot Banking Group (5.74%), Premier Fund Managers (5.21%) and BennBridge (4.82%).

Confident Management

With the results, Chief Executive David McCreadie stated that the group had delivered a strong and resilient performance in the face of extremely challenging conditions and is well placed to flourish as the market recovers.

He went on to say that, “I am excited about the journey ahead. We are well-positioned in attractive, specialist lending markets and see a clear opportunity to build on our strong foundations. STB will become simpler, more efficient, and clearer in its growth ambitions. I am confident in our ability to return to growth and create sustainable value for our stakeholders.”

My View

I apologise for not having profiled the company a lot earlier, but I do feel that it now offers quite substantial upside to its income, profits and share price.

My target price is 1,500p, with the shares currently cheaply rated trading on just 10 times current-year earnings.