Pawnbroker H&T GROUP PLC weathered the storm during the gold price slump, and unlike some erstwhile rivals, is around now to enjoy the recovery.
Results for 2016 showed an upswing in the gold price and growth in personal loans meant pre-tax profit clocked in at £9.7mln, up 42.6% from £6.8mln the year before and ahead of the £9.3mln the market had been expecting before H&T tipped them the wink in a trading statement in January.
January’s profits guidance uplift came just a couple of months after a previous upgrade.
The increased gold price benefits the group's Pawnbroking Scrap and Gold Purchasing segments, the company noted.
If the market was a little grudging in its recognition of a sparkling performance, that’s probably because it had already spotted the benefit the company was likely to enjoy from the recovery in the price of the yellow stuff.
Maybe it had also taken note of the company’s efforts to redefine the pawnbroking model in the digital age.
The group’s development of its lending activities continues, and at the end of December the pledge book had increased to £39.1mln from £39.0mln at the end of June, while the Personal Loans book had risen to £9.4mln from £6.3mln at the halfway point of 2016.
A long history
H&T, over 100 years old, is a simple business to understand, with pawnbroking lending as its core, accounting for around 60% of revenues.
Much of the reason for its success and survival has been a willingness to branch out into other areas, such as personal loans, foreign exchange and retail. Chief executive John Nichols expects this diversity to continue to get results.
The group remains committed to its High Street retail offering, and its H&T brand is the leading pawnbroking business in the UK, with stores across the nation.
In 2014, the group created its est1897 brand – the H&T Group (once known as Harvey & Thompson) has been around since 1897 – to sell antique, vintage and retro jewellery that looks as good as new.
"I think we can do much better (with est1897) and link it in more particularly with our online offering," Nichols told Proactive, meaning people will be able to look on the internet and order jewellery to be delivered to a store or at home.
A split between bricks and clicks, he explained.
Though late to the e-commerce party, Nichols said H&T is now catching up, although he conceded it’s an area that comes at an investment cost.
However, the group rejigged its banking facility in February, and with net debt down to £6.9mln at the end of June 2016 from £8.9mln a year earlier, the company is operating well within its banking covenants.
The loan arranger (hi-ho, Silver, away!)
Another area of growth the group has been targeting is the personal loan market.
H&T's personal loan product allows for loans of up to £2,500 over any term of up to three years based on affordability. Around 80% of the loans issued by the group in the first half of 2016 fell under the definition of “high-cost short-term credit” (HCSTC) and as such must comply with additional rules under the Financial Conduct Authority regulatory regime.
The group believes its personal loan product is cheaper and more flexible than most of the competition’s offerings, and each loan is manually vetted.
The group intends to reduce the proportion of HCSTC loans over time as it expands its lower annual percentage rate, longer-term loans for its customers.
While the recovery in the price of gold has caught the eye of late, it is worth noting during these turbulent times for sterling on the foreign exchange markets that the group's foreign exchange service grew strongly in the first half of 2016 and chipped in with gross profits of £0.8mln.
“We believe that further expansion in this product is possible through keen pricing and increasing awareness. The larger providers typically charge a significantly higher margin than H&T while also capturing the vast majority of the market. As we become established in the market we believe that more customers will seek us out,” the company said.
Meanwhile, the group's "buyback" division is attracting a younger demographic, typically 18-24 year-olds who have been cashing in electrical items and mobile phones, “rather than a bit of bling, innit?”
Golden earring; golden earnings
So, the dependence of gold has been reduced, but the fact remains, in the words of Nichols, that more gold demand now can only be good for the firm.
"It's a cyclical thing. If you've got more gold out in the population, the more opportunity there is to lend against it," he said.
"There's always been a demand for credit and it's not just the middle band that has got credit cards," he pointed out.
An EPS of 20.9p puts the stock on an undemanding projected earnings multiple of around 13.5, while the full-year dividend of 9p, up from 8p last year, gives a handy yield of around 3.2%.
A “rare” opportunity say the brokers
“Rarely can investors buy a 20% growth stock with a sound balance sheet and strong management on a price-to-earnings ratio of 10.6x,” said City broker finnCap.
“We believe our revenue and gross profit expectations remain conservative given the potential revenue upside from FX and the growing personal loan book.”
The broker put the stock on its ‘10 for ‘17’ watch list, and the broker – which has the stock as a buy in case you hadn’t guessed – is tipping the share price to top £4 by the end of 2017. It currently trades at 281.25p.