- Specialist lender on course for third straight drop in annual profits
- First interim dividend payment reduced
- Lower interest rates and conclusion to FCA motor finance inquiry both potential positives going forward
- Shares rebound from near four-year lows
“An increase in loan impairments, higher interest rates and regulatory pressure have all taken a toll on first-half earnings at specialist lender S&U, which has also cut its first dividend payment of its financial year,” says AJ Bell investment director Russ Mould. “The shares do not seem unduly perturbed, however, perhaps because they are already trading near four-year lows, while the company’s soothing words on the Financial Conduct Authority’s investigation into the car financing market, its financial strength and long-term record of sensible lending may also persuade shareholders to stay patient.
“The combination of cooler inflation, lower interest rates from the Bank of England and improved consumer confidence and economic growth could also be a boost to S&U, although in this respect management will doubtless be looking as closely at the growth-oriented policies provided by the imminent Budget as everyone else.
“It also seems as if the company is ready to step out from under the cloud caused by the FCA’s inquiries regarding discretionary commission arrangements (DCAs) in the motor finance market.
“S&U’s Advantage Finance arm has acknowledged that a tiny handful of cases, relative to the overall customer base, has attracted regulatory scrutiny and as a result the operation has encountered costs, revised documentation, adopted voluntary restrictions and changed some business practices to ensure that customers continue to get the best possible outcomes.
“Transactions fell 13%, sales by 3% and profits more than halved at motor finance expert Advantage, where an increase in bad loan charges and higher borrowing costs also had an impact. However, loan applications rose 22% year-on-year to suggest that S&U’s reputation within the market is not besmirched and that underlying demand for its services remains healthy.
“Total receivables at Advantage fell only modestly and they grew by nearly 50% at Aspen Bridging to suggest the company is primed to benefit from any sustained upturn in the property refurbishment market.
Source: Company accounts. Financial year to January.
“Total receivables across the group set a new all-time high in the first half, as S&U laid the foundations for future growth.
“It may be that shareholders are focusing upon this, rather than the drop in first-half earnings, which implies analysts are on the right track with their forecast of a third consecutive drop in annual pre-tax profit. Consensus estimates currently expect a sizeable rebound in earnings in the company’s financial year to January 2026.
Source: Company accounts, Marketscreener. Financial year to January.
“The forecast of a healthy recovery in earnings may suggest S&U’s shares represent a bit of value to capital growth and income seekers alike, on a forward price earnings multiple of 10 times with a dividend yield of nearly 7%, according to consensus analysts’ forecasts.
“Admittedly, S&U has just sanctioned a cut in the first of the three dividends that it traditionally pays during its financial year – an interim in November, one further interim in March and then a final payment in July. Company chair Anthony Coombs has declared an initial distribution of 30p a share, compared to 35p a year ago. This may question analysts’ forecasts of a minor increase in the total payment to 121p, up from 120p, but there are still six months to go so far as S&U’s fiscal year to January 2025 is concerned.
Source: Company accounts, Marketscreener, consensus analysts' forecasts. Financial year to January.
“Such a figure would still exceed the pre-pandemic peak of 120p a share (excluding 2016’s bumper 125p-a-share special dividend) and be a testament to the value of S&U’s service to its customers across its two niches, both of which the big banks appear content to leave well alone.
“Through its Advantage Finance arm, the Solihull-headquartered firm provides non-prime loans for cars, while the fledgling Aspen Bridging operation offers property loans for individuals and commercial borrowers who wish to purchase or refurbish an asset.
“Some investors may share the big banks’ reticence to get involved, especially if they have concerns over the UK economy and its car and property markets.
“However, S&U does manage risk in a disciplined manner, as you would expect of a company that dates back to 1938 and can point to three generations of management by the founding family, which still has a major shareholding.
“S&U has the ability to borrow up to £280 million from its own lenders and with just £239 million of those facilities already deployed, S&U has a further £41 million available for future growth.”
