H&T Group – Profits Upgrade estimates reinforce the 27% gain in just one month, with even more to come

Wow what a real performer this company has proved to be in the last month.

The UK’s largest pawnbroking group yesterday declared its interim results for the six months to end June this year.

I refer readers to my Profile on the company on 6 July, that was when when I commented upon the alternative credit company’s potential to see its shares respond well as signs of its ‘recovery’ process start to really show through.

By 22 July the shares burst upwards and way above my 400p Target Price, hitting 415p that day. Then I stated that there was still a lot of upside left in the price, however if you were a new buyer my advice was to wait for them to fall back after that fast rise, before getting in.

By 27 July they dipped down to 386p and stayed in the sub 400p region until 1 August, when they started to lift up again.

Interim results to end June

Yesterday after the excellent Interims announcement the shares touched 440p before closing last night at 423p.

They showed that the continued momentum in its core pawnbroking business had underpinned a strong performance.

Pre-tax profits rose at the half-way stage by 42.6% from £4.7m to £6.7m, lifting earnings from 9.3p to 13.1p, and hoisting the interim dividend by 1p to 5p per share.

Notable was the significant increase in the group’s net pledge book up 69.5% to £85.1m.

The average pledge lending value remained below £400, while the median lending value for the first half of 2022 was £180 per loan (6 months to December 2021: £170). Importantly the average Loan to Value remained below 65%.

Pawnbroking looking strong

The group anticipates continued strong demand for its core pawnbroking product, especially as the impact of inflation on the consumer increases the need for small sum, short-term loans at a time when supply of credit is more constrained than has been the case for many years.

Pawnbroking is a loan secured against a collateral (the pledge). In the case of the group, over 99% of the collateral against which amounts are lent comprises precious metals (predominantly gold), diamonds and watches.

The pawnbroking contract is a six-month credit agreement bearing a monthly interest rate of between 1.99% and 9.99%.

If the customer does not redeem the goods by repaying the secured loan before the end of the contract, the group is required to dispose of the goods either through public auctions if the value of the pledge is over £75 or, if the value of the pledge is £75 or under, through public auctions or the retail or pawnbroking scrap activities of the group.

The other operations

The group is a leading retailer of high quality pre-owned jewellery and watches. It also offers customers an expanding range of new jewellery items.

Retail sales for H1 grew by 67.7% to £20.8m (£12.4m), which generated profits of £8.7m (£6.7m).

Other services include Gold Purchasing, Pawnbroking Scrap, Foreign Currency (FX), Money Transfer, Cheque Cashing and Personal Lending.

Combined net revenue generated from Gold Purchasing, Pawnbroking Scrap, FX, Money Transfer and Cheque Cashing was up 74.5% to £8.2m (£4.7m).

Chief Executive’s comments

With these results group CEO Chris Gillespie, stated that:

“The positive trading momentum which began in late in 2021 has continued into 2022, with monthly demand for pledge lending growing, consistent appetite for our new and pre-owned retail products, and a strong rebound in gold purchase and foreign currency sales.

We anticipate that demand for our services will continue to grow in the months ahead, and we are investing in scale and capabilities, both operational and technological, in order to take advantage of the opportunities ahead of us.”

Broker’s View

Research analyst Gary Greenwood at Shore Capital, the group’s NOMAD and broker, reflected upon the strong set of H1 results and has materially upgraded his earnings forecasts and his ‘fair value’ estimate.

Accordingly, he has upped his profits figure by 18% for the current year to end December, to £18.7m (£10.0m) of adjusted pre-tax profits, earnings of 36.5p (20.8p) and a dividend of 15.0p (12.0p) per share.

For the coming year he is now going for £28.8m profits, 56.3p earnings and 22.5p in dividends per share.

For 2024 Greenwood’s estimates are £33.6m of profits, 64.3p earnings and a 27.0p dividend.

He also raised his ‘fair value’ from 430p to 470p per share.

My View

I agree with the group’s management in that it believes that the company has an opportunity for significant growth in the medium-term.

In my original Profile I suggested that the group’s broker could well be upgrading his figures and those that resulted yesterday give me massive confidence in the substantial impact that the current recovery is showing.

Way above the Shore Capital ‘fair value’ of 470p, I believe that the shares have 500p written all over them for the short to medium-term.

A very strong hold, with an ongoing purchase view if they happen to dip below the 400p level again before the next corporate statement.

Last night the group’s shares closed well up on the day at 423p.

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

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