S&U home credit division has the potential to double shareholder value, says Collins Stewart

The consumer credit group S&U’s (LON:SUS) Home Credit division has the potential to double shareholder value over the next three years, according to Collins Stewart.

The City broker initiated coverage of the stock this morning with a buy recommendation and 750 pence a share price target (current price 608 pence).

Analyst Robin Savage said while Home Credit is a mature business it is also the ‘cash cow’ which more than funds the company’s healthy annual dividend payment. 

On its own, the operation is worth 475 pence a share, he reckons.

Meanwhile, the Advantage car credit division is sensibly geared and has a growing loan book, he notes. 

In all Savage believes S&U is a well run business that uses bank debt to enhance its returns on secured lending. 

And with an annual dividend payment amounting to less than 60 per cent of group earnings, it is able to fund its loan growth with its own cashflow as well as repaying its bank borrowings.

For income players there is a dividend yield of 5 per cent, with the payout potentially growing by around 5 per cent per year, the analyst points out.

“In our opinion S&U Home Credit has the potential to double shareholder value over the next three years as it delivers returns to shareholders and its rating improves,” said Savage in a note to clients this morning.

S&U provides an estimated £80 million-worth of loans. Half of them are small, short-term “advances” averaging £300 each, or slightly larger loans of £480 paid over 38 weeks. The remainder are in the £5-10,000 range for motor finance.

The Midlands-based niche money-lending was established in 1938 by Clifford Coombs, the grandfather of the current chief executive Anthony Coombs.

The firm was floated in 1961 and has more than 140,000 customers and nearly 800 employees.  CEO Coombs describes the business as “recession resistant”.

S&U's home credit service operates under the Loansathome4U banner. It has around 500 representatives who on average collect around £3,000 a week.

The advantage Motor finance business arm, meanwhile, offers hire purchase finance to riskier borrowers.

Coombs believes the company’s model works well because of the personal service it provides, particularly to the customers of the home credit business.

"I think we are extremely popular and will grow in popularity because people want relationships. They can't get relationships with the banks anymore,” he told Proactive Investors this week.

"A lot of people are nervous of remote lending and people like our very convenient finance." 

On current trading, the S&U chief said the company was performing well and that sales were ahead of last year.  "Our collections are strong," he added.

In terms of the car finance business, applications levels are “good”, Coombs revealed. Indeed applications have been buoyed by people coming down from other areas of the market into Advantage's market sector.

"Our figures for the motor finance business are extremely good. For example we beat our budget last month by about 22 transactions (about 6 per cent)."

Coombs said he has 'every confidence' that the firm will meet its budgeted increase in turnover (for transactions) of around 10 percent for the car business.

"The quality of the debt is very good. So therefore our bad debt and the amount of money we can take into profit which is related to our collections is also looking good."

Asked about the company's possible move to AIM, revealed after last month's AGM, Coombs said the matter was as yet undecided and hinged on shareholder support.

The S&U boss appears very happy with direction of the company and its performance. We don't think there is any regulatory problems so far as the business is concerned.

“Therefore there's not too much that keeps me awake at night. But that's only on the basis that you work very hard indeed at managing the business."