Secured SME Lending Shift And Operational Leverage Will Drive Stronger Long-Term Earnings

Catalysts

About Time Finance

Time Finance is a nonbank alternative finance provider that delivers invoice, asset and loan funding solutions to UK SMEs.

What are the underlying business or industry changes driving this perspective?

• Ongoing retrenchment and tighter risk appetite from mainstream banks is pushing more SMEs toward independent lenders that can move quickly and structure secured facilities. This is expected to underpin sustained growth in originations and the lending book and support higher revenue.
• Structural demand for working capital and equipment finance in core sectors such as transport, construction and services is rising as SMEs navigate insolvencies and longer payment cycles. This reinforces the appeal of multiproduct providers and supports volume growth and stable net interest margins.
• Investment in scalable Microsoft Dynamics based platforms, better data and a dedicated business improvement team is increasing operational leverage. This allows the book to grow beyond GBP 300 million without a comparable rise in head count, which is expected to lift PBT margins into the mid 20s and improve earnings growth.
• The deliberate shift toward secured lending in invoice finance and hard assets, now above four fifths of the book and targeted to exceed nine tenths, is improving portfolio resilience and credit performance. This is expected to help keep arrears and write offs within target ranges and protect net margins and earnings quality.
• Significant unearned income already embedded in the existing loan and lease book, combined with record and rising quarterly originations, provides strong visibility on future income streams. This is expected to support consistent revenue growth and a compounding effect on earnings and return on equity over the plan period.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Time Finance's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.8% today to 18.0% in 3 years time.
• Analysts expect earnings to reach £7.6 million (and earnings per share of £0.08) by about December 2028, up from £5.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, up from 8.5x today. This future PE is lower than the current PE for the GB Diversified Financial industry at 16.8x.
• Analysts expect the number of shares outstanding to decline by 0.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.52%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged downturn for UK SMEs, marked by elevated insolvency levels, could overwhelm even a well controlled arrears book and push bad debt write offs above the current 1 to 2 percent target range, eroding net margins and reducing earnings.
• If mainstream and challenger banks eventually loosen their current tight risk appetite and re enter SME lending more aggressively, Time Finance may face pricing pressure and weaker origination growth, which would limit revenue expansion and constrain profit growth.
• The strategy relies heavily on operational leverage from Microsoft Dynamics platforms and process improvement. Any implementation delays, system issues or weaker than expected efficiency gains would keep cost growth closer to lending book growth, capping PBT margins and depressing return on equity.
• Plans to expand into new geographies, direct to market channels and bolt on acquisitions increase execution and integration risk. Missteps in sales hiring, credit discipline or M&A could lead to lower quality lending, higher arrears and weaker earnings growth than expected.
• The funding model depends on continued support from a diversified panel of banks and sustained access to over one quarter of a billion pounds of facilities. Any tightening in wholesale funding markets or deterioration in funder appetite could restrict book growth below the stated 300 million pound target and limit revenue and profit growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £1.12 for Time Finance based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £42.5 million, earnings will come to £7.6 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of £0.55, the analyst price target of £1.12 is 51.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.