S&U : Quality in credit

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3 mins. to read

The resurgence in consumer confidence seen in recent months and years offers significant growth prospects for a companies like consumer credit company S&U (SUS), which has built a significant business on the back of the exit of a number of major players from the direct unsecured lending markets following the financial crisis.

According to figures from Nielson, consumer confidence in the UK grew at five times the pace of the global average in 2014, to reach the highest since 2006. The short-term trend is also showing positive momentum, with polling by GfK showing consumer confidence hitting a five-month high in January. With CPI inflation having fallen to a record low of 0.3% in January, and wages now beginning to outpace price rises, there is ample reason to believe that the consumer renaissance can continue.

Ahead of its results, due on 24th March, S&U recently announced a very upbeat trading statement. Despite evidence of further competition, its Motor Finance division, Advantage Finance, saw record trading with advances for the year up 48% on last year. Credit quality is said to be at its best ever level and live customer numbers have increased by over a third in comparison to last year. Another record year is anticipated in FY15. Meanwhile, home credit division Loansathome4u also saw double-digit growth in turnover and customer numbers.

Strong growth – but not at the expense of credit quality

What normally happens in a growing market is that lenders take on more business at the margins – i.e. lower credit quality. This is not so at S&U. The firm continually updates its under-writing model to ensure debt quality is maintained in a growing market. Tangible evidence of this cautious approach can be seen in the fact that weekly collections in the home finance division are up by 12% whilst credit availability is ahead by no less than 20% on a year ago. In other words, the firm has the capacity to lend more, but isn’t chasing business that could compromise its own risk profile.

As the firm outlines in its trading update, the quality of the group’s debt both in motor finance and home credit has been reflected in increased trading and in strong cash generation. As a result, gearing has fallen slightly to 67%, down from 70% as of 31st July 2014, and current facilities provide “sufficient headroom” for anticipated growth in the current year. This level of gearing is relatively modest when compared with industry peers; for example, Provident Financial (PFG) was 2.9x geared as of 30th June 2014.

Possibility of a step-change in 2015

S&U is currently exploring the possibility of submitting an application for a Deposit Taking licence in the first half of this year. This could result in a significant reduction in the overall cost of funding for S&U (think of the paltry interest rates currently on offer for bank deposits), and could provide a major uplift to returns.

In any case, S&U is already doing a pretty good job of rewarding investors. The recent trading update saw the company approve the payment of a second interim dividend of 19p per ordinary share (2014: 16p), which means that the first and second interim dividends this year will represent 36p against 30p last year – an increase of 20%. The firm has either grown or maintained its dividend in every year since 1988, which is a very respectable record to say the least.

Despite the strong track record and solid prospects, the shares don’t look overvalued. Consensus forecasts put them on a prospective current rating of 12.3x with a prospective dividend yield of 3.5%. for FY17, the prospective rating falls to 10.9x and the prospective yield rises to 4.1%.

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