In particular after a day when there were revelation about VW fiddling their emission tests in the US it is perhaps worth starting with bumper interim results from S & U (SUS). This saw a continued strong performance from their Advantage car finance business which saw profits up by 32% on the back of a strong car market in the UK. The other significant feature of these results was their disposal of the home collected credit business in the period with the proceeds of £82.5m being used to fund a special dividend of £1.25 which equates to 5% at the current share price of 2500p. The first interim dividend (they unusually pay three dividends per year) was also increased by 18% from 17p to 20p. Current forecast are for only 11.7% underlying dividend growth to 73.8p, so if the current rate of increase is replicated in the rest of the year then a total of 78p looks possible which would leave them on a reasonable 3% or so yield at 2500p.
I estimate this will leave them with no debt and may be a small cash position versus the £65m or so debt that they had previously. The management say the disposal is transformational as it allows for further investment in the rapidly growing and profitable consumer motor finance business and by taking it into the SME market. In addition to this theyare also talking of investing into what they describe as other specialist finance businesses with growth potential. Of course it remains to be seen what other areas they choose to invest in which does introduce an element of uncertainty and risk but also opportunity for earnings enhancement as cash / debt facilities are utilised.
As you can see from the chart below the shares, which are up 5% or so this morning to around 2500p, has been something of a ceiling on the share price in recent months. So it will be interesting to see if this will continue to be the case before any further details of how they are investing the cash emerges or if there is enough in these numbers to prompt a break out. I guess time will tell but on around a mid teens PE maybe it too early for a break out just yet especially
once it goes ex the special dividend.
Meanwhile we have had updates from two more stocks which feature in the Mechanical Compound Income Scores Portfolio. First was a positive Q1 update from IG Group (IGG) who benefited from a strong August against a weak comparative as nervous financial markets gave clients much more reason and opportunity to trade. Perhaps the poor weather in August also encouraged domestic customers to trade more rather than being distracted by nice weather and out door pursuits.
The shares like markets have been trading sideways this year as their earnings were down slightly and the dividend was flat at their last year end in May and they were looking fairly fully valued as a result on a 20x+ PE. However with this good start to the year and a resumption of growth forecast as their new broking business gains clients then they may be more interesting again now with a prospective rating is closer to a mid teens PE and with a dividend forecast to grow again to give a yield of just over 4%. Looking at the chart though it looks as though 740p to 800p or so may be the trading range for now until we see how the rest of their financial year develops, but so far so good and it has a Compound Income Score (CIS) of 84 before any changes on the back of today's update.
I mentioned the weather above because the other announcement of interims today from AG Barr (BAG), the Scottish drinks producer, included a weather related profits warning and as a result they now expect their full year results to be broadly flat, which probably means slightly down. So this could take earning from the current forecast of 30p back by around 7% to last years 28p. The dividend was however raised by 8% in line with current forecasts suggesting that they will still deliver the expected 13.1p dividend. The share have fallen by 5% or so to 532p this morning to reflect this set back which will leave them on a fullish looking 19x with a lowish 2.5% yield. So not a lot to get excited about on the rating front although this is a quality business so it may be worth watching to see if they drift off more as this is not really a fundamental problem with the business as such and they will have weak comparatives next year as opposed to tough comparatives this year.
It still has a CIS of 87 reflecting the quality and growth, but after today's results and growth set back this may slip a little once the down grades are reflected in the data although dividend growth still seems likely. Technically it has just broken below its 200 day moving average and 500p looks like the next medium term support level so probably no rush but worth watching and revisiting perhaps if it should get down there or even into the 450 to 500p range.
..as despite EU leaders trying to tell Greek voters that a No vote would be a No to the Euro here we are again with another last chance to do a deal by this weekend, although supposedly they have a plan B which allows for a Grexit. I guess we'll have to wait and see again. Or it could be Georgehog day as we have another budget today from George Osborne.
Meanwhile in the UK stock market all the on going concerns over Greece forced the FTSE down into the support zone between 6200 and 6400 that I suggested recently. We also had an in line update from Interserve (IRV) who saw a slow down in construction in the UK but did flag some big orders they have won recently. There was a slightly better than expected updated from Connect (CNCT) bolstered by their acquisition last year. Both look good value but weak finances somewhat detract from the bull case and may help to explain the low ratings.
The other more interesting announcement yesterday came from S&U (SUS) who revealed an unsolicited approach for their home credit business from the new business Non-Standard Finance which was set up by the former Chairman of Provident Financial and back by Woodford Asset management among others. This is quite a big move for S&U as this has been the core of their business for years and their plan is to reinvest some of the proceeds into their more recently established and rapidly growing car finance business. The other effect will be to leave them with cash on the balance sheet and once they have worked out their capital requirements and investment plans they say they will consider a return of capital to shareholders after consulting with them.
This was quite well received with the share up a few percentage points in a soggy market yesterday. However, they did suggest that it will dilute their earning in the second half so it will be interesting to see if it can sustain a re-rating on the back of this given the higher growth and returns that they get from the car finance business. I just hope they are not going nap on it just as the latest UK consumer debt fuelled boom gets back into top gear again and car sales hit record highs.
We have had an IMS from S&U (SUS) today which unlike their more recent statements contained a more down beat and perhaps realistic note of caution with trading described as satisfactory. This included just expecting to meet rather than beat targets, as it has done in recent years, in what they describe as their maturing motor finance business.
In addition on the home collected credit side they also allude to a more cautious tone ahead of the election - which I guess may have been understandable. But they suggest that they will see a bounce back in both divisions now that is out of the way, which seems reasonable given how the housing market seems to have reacted to the result.
Thus I'm not surprised to see it off a bit this morning, but I don't think it is the end of the road even though growth may be moderating a bit going forwards. Despite this I think this one still looks good value on less than 12x with a 3.5% yield for this year, so I'd be happy to hold.
Finally I have a confession for you today. You may recall when I launched the Mechanical Income portfolio back in April I said that I couldn't bring myself to buy Utilitywise (UTW). Well in the end I caved in and treated myself to a few just after that on the back of Woodford AM upping their stake. However, as it has done so well in such a short space of time and it's such a volatile one and it's gone ex 1.7p today I've decided to lock in a quick profit today. Spivvy I know but I still don't really trust it and I think it could still have a profits warning in H2, but looking at the chart, if you are still in it, 280p might be a better target and more obvious resistance level to think about an exit, but I guess time will tell. Fortunately I didn't get tempted to buy into PLUS500, but that probably deserves a post of it own in the near future, hail Mary.
...or forecast beating final results from S&U plc (SUS) the 77 year old motor finance and home collected credit provider which has a market cap of around £250m. I say motor finance first as this has been the driver of the profits growth in recent years and now accounts for 72% of the pre tax profits after a further 42% growth in profits in this division on the back of 38% revenue growth.
This together with 11% growth from the home credit side led to earnings per share of 156p (+38%) v 149.1p forecast while the dividend was 1p ahead of forecasts at 66p (+22.2%). This suggests there could be some scope for upgrades to this years numbers which prior to today saw further earnings growth of just under 20% and dividend growth of 12.7% according to Stockopedia.
This seems a reasonable expectation as the UK car market is quite buoyant at present and they continue to trade well, although they did allude to some increased competition which they had anticipated last year. In addition on the home credit side they say they are benefiting from industry consolidation, regulatory changes and opening three new branches last year with another planned for this year. They also flagged that both divisions had gained from rising consumer confidence and, latterly, a perceptible increase in disposable real incomes which seems to be continuing at present.
All this increased activity and growth has meant an increase in borrowings to £53.6m or gearing of 66% which they are comfortable with and which is pretty conservative for a banking / finance group. The Group has sufficient headroom to finance anticipated growth this year. Bank facilities of £70m have also been confirmed through to 2018.
On the regulation front they gave some detailed commentary on this in the statement and they seem to be benefiting as other less well established businesses perhaps shut up shop on the back of it. They have also appointed a new non executive Graham Pedersen, formerly of the Prudential Regulation Authority to oversee to their new Compliance Committee. They also hope to obtain a deposit taking licence which, if approved, would see them taking deposits from 2016 and this could also be favourable for their financing at the margin.
Summary & Conclusion
Another good set of forecast beating numbers from S&U leaves them looking good value on around 12x with a 3.5% yield which is likely to be more than 2x covered for this year, based on high teens forecast earnings growth, prior to any changes on the back of today's numbers. The shares are also trading around their all time high which can put people off but can also consequently be positive on momentum grounds if there is an under reaction to the positive news as a result.
Thus given the results and the outlook I am happy to continue holding this one instead of banks (see second chart below) as I wouldn't be surprised to see it breaking out to the upside in due course. Indeed I see that Panmure Gordon and Canaccord Genuity have both upgraded their price targets (for what that's worth) to 2400p.
Another positive update from S & U, which I have written up before, with the highlights as follows:
The shares in common with other small and mid cap shares have come back somewhat recently as you can see from the chart below. Given the continuing strong underlying performance this has left them looking oversold and trading close to their 200 day moving average, although others I guess might read it as a top formation? However, based on this years forecast earnings and dividends of around 140 pence and 60 pence respectively the shares at 1700 pence are trading on a P/E of 12.1x with a yield of 3.5% which seems quite good value to me. Given the growth of 20%+ according to Stockopedia this means it currently qualifies under Jim Slater's Zulu screen criteria based on it being on a low PEG ratio (price to earnings growth). On this basis I'm happy to run with it but I have been a long term holder of this one any way based on its conservative management and steadily rising dividends over the years.