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I first recommended door to door and auto credit provider S&U (LSE:SUS) at 582.5p. Following half year results announced on 26th September, the shares now trade at 910p but along the way the company has also paid out dividends of 207p making a total return to date of 92%: those who follow me have almost doubled their money. But there is more to come and I reckon that this stock is worth holding up to £12 and here is why.
The company derives its income from two sources. The first is home credit. Providing small loans on a door to door basis for folks on council estates. The sums are small and the interest payable is steep but not usurious. There is a relationship between collectors and repeat customers and bad debts tend to be low. The second is the provision of motor finance. It is a similar business model. S&U’s customers are not buying Porsches.
In the six months to 31st July, revenues increased by 8% to £26.8 million and pre-tax profits (operational gearing) rose by 14% to £7.3 million with earnings per share rising by 18% to 47.1p. The company increased its dividend by 1p to 12p and gearing came down from 38% to 33%.
This is a conservatively run company with the Coombs family owning more than half the shares and Anthony Coombs ( a former Tory MP who is far too right wing to be in Call Me Dave’s dismal party – all credit to AC) now at the helm. I chatted to Coombs yesterday and am meeting him for a coffee later this week for a longer catch up on various matters. There are a few matters to flag.
- The second half is 26 weeks not 27 so the results will reflect that.
- The economy is tough. This is not causing a bad debt issue – S&U customers always pay in the end. But it may cause an incremental slow down in revenue although there are no signs of that yet.
- There is a pending report on “High Cost Credit” providers. Coombs feels sure that this is going to bash not long established businesses like his but the new breed of “pay day loan” providers who, in my view, really do charge unacceptable rates of interest. Sadly they cater for a different demographic ( young workers, not middle aged C2s,Ds and Es) and so if they are kicked into touch it will make little difference to S&U
- Gearing should continue to fall. Borrowings will increase marginally as S&U invests in growing the auto business but as a percentage of net assets borrowings will continue to fall by a few points a year.
And so what do I expect? Full year ( to 31st January 2013) pre-tax profits will, I expect, come in at c£14.2 million with earnings at around 93p. Next year I would expect low double digit growth at both the pre-tax and earnings level with revenues growth at around 6-7%. That should fund a current year payout of 43p ( up from 41p) and next year I am looking for 46p.
As such the shares trade on a January 2013 price earnings ratio of just under 10 falling to less than 9 and on a current year yield of 4.73% rising to 5.05%. I would argue that for a solid company that has delivered consistent (if dull) earnings growth over many years and will continue to do so the rating is too low and the yield too high. As such a one year target of £12 ( a current year yield of 3.83% and PE of 11.5 ( PEG of 1) is hardly demanding.
This has been a good solid tip to date but it is not too late to add a few. For a decent capital gain and solid income, S&U is a steady buy.
