Description

H&T plc

H&T is the UK's largest pawnbroker with 278 stores. The business segments are similar to Ramsdens Plc Ramsdens Holdings PLC (RFX:LN) the difference being that H&T’s business dynamics are dominated by the pawnbroking segment and related scrappage which accounts for ~75% gross profit. The services offered in store are Pawnbroking, Precious Metal Buying & Scrappage, New and Pre-owned Jewellery sales, Watch sales & repair and FX-travel money.

The pawnbroking business currently has tailwinds due to economic and regulatory factors. The economic factors being the inflation induced cost of living crisis which has resulted in people requiring small-sums of credit for short periods but not having access in the UK via traditional banks or any other form of credit. While the regulatory driver comes from the UK FCA having acted to regulate away all other small-loan finance after the financial crisis. In the aftermath of 2008 financial crisis the economic downturn resulted in significant demand for small-loan services to a large demographic not able to get small short-term loans from banks. In this vaccume there sprung up many unregulated companies who issued small loans and charged large compounding interest, resulting in many people getting into financial difficulty, so eventually the regulator got involved and made their business unvaible. This has left pawnbrokers as the only large scale means of small-finance. Pawnbroking loan books are low risk because the loan to value is typically 60%-70% of the pledged item and is backed up with a physical asset.

For H&T the ~129m loan book is backed by assets worth ~£184m most of which is gold & precious metals. The majority of these are small loans to individuals, however there has also been a recent trend emerging where H&T is issuing larger loans to small business owners, backed by assets, for their working capital needs.

H&T's business growth is dependent on footfall and the relationships between staff and customer. As the largest pawnbroker with a network of 278 stores and growing, H&T is well placed to continue to grow.

Pawnbroking (40% FY23 Revenue / 71% gross profit)

Pawnbroking is a small subset of the consumer credit market in the UK and a simple form of asset backed lending (i.e. lending against a pledge item: gold, silver, jewellery), typically small sums ~£428 over a short period ~ 6 months with interest rates varying from 1.99% - 9.90% per month depending on the loan value. Interest is charged on a daily basis so the quicker a customer can repay the less interest is paid.

It has a large loan book of ~£129m which has grown 30% in the last year. The maximum downside to the borrower is loss of the pledged item which is sold in store or scrapped.

Example of rates

A pawnbroking loan is a flexible loan in that there are no expected weekly or monthly instalments. The customer chooses when they repay their loan. As such there are no missed payments until the loan period expires. At which point the loan+Interest+fees are met by the disposal of the item and surplus cash is returned to the customer

• The loan-to-value is conservative. Customers pledge their gold, precious metals or other jewellery about a 60% to 70% loan-to-value. Thus, leaving more than 30% margin of safety on any loan
• The average loan value ~£428 in FY23 up from £405 in FY22
• Loan to Value averages around 65%
• 85% pay the loan back with interest
• Increased rate in FY23 after a review
• Due to watch price volatility, they have reduced lending against watches
• FH23 Pawnbroking is up 28% to £129m from £101m

Gold Purchasing and Pawnbroking Scrappage (32% Revenue/10.5% Gross Profit)

H&T purchases unwanted gold or scraps items of gold or precious metals when pawnbroking loans are not redeemed. Gross profit earned from scrap& purchasing was £13.3m (2022: £10.2) with margin ~ 20%

• Supported by a strong gold price

Retail Jewellery ( 22% Revenue/ 11.3% Gross Profit)

They sell new and pre-owned jewellery and it is the second largest segment.  Sales increased by 8% fin FY23 to £48.6m up from £45.2

• New jewellery items 25% sales with a gross profit margin of 30%
• Pre-owned jewellery 50% sales with a margin of 45%
• Pre-owned watches 25% sales with a margin of 20%

However, due to further pressure on consumer spending there was a different mix of items sold and this impacted margins. More opted for New goods with lower margin and the retail gross profit was down 19% to £14.4m (2022:£17.8m) with an overall gross margin of 30%. They have now increased the retail prices to mitigate this trend and drive consumers to higher margin items. Trading in the first 2 months had seen the trend reverting back to the mean and they expect this to continue.

Foreign Exchange (3% Revenue/4.8% Gross Profit)

This is their holiday money offering they have seen a slight decrease in amount being exchanged in store but consumers are still prioritising holidays to the offering is still buoyant

• Average store transaction values reduced slightly year on year, to £386 from 2022: £390
• Click and collect a new offering implemented in June 2023 has seen larger demand at average amount of £685
• Further investment and buildout of the Click & Collect service

Valuation

The stock has a healthy balance sheet, ROE of 12.4% and trades at a market cap of ~£170m which is lower than book value of £177.4m. They also aim to pay ~1/3 of Income as dividends.

• RoE 12.4% up from 9.9% in FY22 as income per store increases
• Book Value £177.4m
• Current Assets are £187.4m
• Total Liabilities £74.7m
• Net Debt £36m
• Free Float 86%

Growth Trend

There is growth across the board as the figures below show. Due to covid shutdowns, I do not include the pandemic disrupted years of 2020 and 2021 while I take 2022 as the recovery year.

FY2022 was a recovery year after covid so it drags down the numbers making the annual compounding lower than if the business had been fully functional in 2022.

Given the growth it has experienced in top and bottom line as well as paying a growing dividend I think it’s too cheap in absolute terms.

The stock trades around 5X EBITDA and a P/E of 8.

The pawnbroking loan book and related business segments account for ~75% of gross profit and given the tailwind of virtually non-existent small loan finance options for individuals I think these annualised growth rates are sustainable and this stock should compound over the medium term. Should retail jewellery take a hit the loan book should compensate in the long term. Furthermore, there are two trends driving income grow. The growth of the store estate bringing in more revenue and also each store is generating more income increasing ROE. Given the trend, both are set to continue in the medium term.

Going by the annualised rates and assuming a continued 5X multiple, it gives a base case of 14% EBITDA growth plus a 4.47% yield growing at 12% per annualised numbers. Which gives a total return at > 19% return this year and beyond over the medium term and you should double your money in less than 4 years.

Of course the growth trend is not linear and the given recent growth rates in FY23 the annualised numbers appear on the conservative side, in fact they are half FY23 profitability numbers. Should the FY23 rates or close to it continue then it doubles in less than 2.5 years.

Risks

• The balance sheet is backed mainly by the gold price both on the loan book and the inventory
• Growth trend rely on footfall, so the staff need to be kept happy and provide a good service to maintain good relationships and encourage repeat business and promote sales in other segments
• Economic downturn would impact the Retail Jewellery and FX business somewhat – but this would also mean further growth in the loan book to compensate

Catalyst

• Lack of alternative small sum loan providers
• Economic downturn