August 2021
The stock pick this month is a company that is not getting much love from the market; down around
44% from this time in 2019. After a bit of a rough ride during COVID,
H&T seem to have consolidated their financials, are making
very decent profits and appear to be
seriously undervalued. Their prospects should only
improve now that the UK has reopened and all 250 of H&T's stores are up and running once again.
How do
H&T make their money?
Pawnbroking is H&T's
core business. It is the largest UK pawnbroker in terms of numberof outlets, customers and amounts lent. The upside of this business model is that yields are generally high and the debt is
always secured
by the item pledged.
Pawnbroking: This is a simple form of asset-backed lending where an item of value, known as a pledge (typically jewellery and watches), is given in exchange for a cash loan. Customers who repay the capital sum borrowed plus interest receive their pledged item back. If a customer fails to repay the loan, the item is sold via auction, retail or for scrap.
After the deduction of interest accrued plus an admin fee, any surplus is passed back to the customer.
Retail: The Group sells new high quality and pre-owned jewellery. This aspect of the business has been hardest hit during the pandemic as
H&T were unable to retail from their stores during the national lockdowns, however, they were still able to offer items through eCommerce sites and via a click and collect service (during the most recent lockdown only). We liked the fact that, during the months unaffected by lockdowns (July to October and December) sales were especially strong. eCommerce sites generated revenues of £3.6m (2019: £4.0m).
Personal loans: H&T offers unsecured loans in store and online. Manual affordability assessments are undertaken prior to issuing any loans. H&T ceased offering high-cost short-term-credit (HCSTC) unsecured loans in October 2019, with all lending paused in March when physical stores were closed. From August, H&T recommenced non-HCSTC lending, taking a very cautious approach with a modest number of loans being made. This absence from HCSTC lending, the reduced loan book, limited current lending during 2021 and the uncertainty surrounding the future of unsecured personal lending for H&T has had a material financial impact, however this process is still being reviewed and may change in the future.
How has
COVID affected H&T?
During the year revenues were impacted by COVID-19 in several ways. During the springlockdown, stores were closed for around two months during which time no interest was charged. Upon reopening in May, many customers who had built up cash reserves, in part due to reduced spending, came in to collect their pledged items and repaid their loans. This resulted in a decline of the pledge book in Q3 2020. They have since seen their book stabilise, but have yet to see the full return of consumer demand for short-term loans as lockdowns, restrictions and furlough support have continued.
What the Chairman had to say: "The extent to which social distancing and pandemic restrictions remain necessarywill determine the pace at which the Group returns to pre-pandemic activity levels. A successful roll-out of the vaccine program will likely lead to increased demand for our services and will determine the extent to which we are able to rebuild our pledge book."
You can read the rest of the most recent financial report here:
https://assets-us-01.kc-usercontent.com/2c4dd8bf-5773-00b7-ca8a-afbf09899b15/c756f5db-dc2d-4b38-b1cb-53355c4112a3/H&T%20Annual_%20Report_Online.pdf
Conclusion
We believe H&T are
undervalued given their current financial status. Low debt levels, low P/E, a healthy dividend (3.2%) which is easily covered by earnings (payout ratio
<8%!) and all that after coming through a
very difficult year for their retail and loan sectors. We believe that H&T is currently trading at a
discount based on current financials, furthermore we believe there is a
big potential upside for H&T as the country opens up again for the second half of 2021.
We will be adding it to the CC
portfolio on Monday.
