Reaccelerating Lending Momentum And Operational Investments Will Drive Strong Long Term Performance

Catalysts

About S&U

S&U provides non prime motor finance and specialist property bridging finance to U.K. customers.

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

• Reaccelerating lending momentum at both Advantage and Aspen, including record monthly originations and longer average loan terms, may help rebuild receivables and support sustained revenue growth.
• New scorecards, upgraded affordability tools and richer data analytics are already improving first payment performance and expected bad debt outcomes, supporting higher quality growth and stronger net margins.
• Structural growth in the non prime motor finance and specialist bridging markets, combined with competitors exiting under regulatory pressure, positions S&U to take share and potentially lift earnings as volumes change over time.
• Operational investments such as self service portals, AI driven customer service pilots and expanded distribution channels are enhancing efficiency and service levels, which may lower unit costs and support margin expansion.
• Optimising the group funding structure from a low geared balance sheet in a changing base rate environment creates scope to reduce finance costs, widening net interest margins and supporting profit growth.

Assumptions

This narrative explores a more optimistic perspective on S&U compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming S&U's revenue will grow by 35.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 29.8% today to 23.6% in 3 years time.
• The bullish analysts expect earnings to reach £39.0 million (and earnings per share of £3.2) by about December 2028, up from £20.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £33.4 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, down from 12.0x today. This future PE is greater than the current PE for the GB Consumer Finance industry at 6.5x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.11%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent regulatory uncertainty around motor finance redress schemes and Section 75 or discretionary commission complaints could resurface, driving higher compliance, remediation and professional fee costs over multiple years, which would weigh on net margins and earnings.
• The recent contraction of the Advantage loan book and reliance on elevated collections rather than new originations may signal that rebuilding receivables will be slower than management expects, limiting the pace of revenue growth and constraining future earnings.
• Management acknowledges a shift toward lower margin products and a desire to move back toward its traditional, higher risk non prime customer base. If competitive and regulatory pressures prevent that shift, structurally lower yields could compress net interest margins and reduce returns on equity.
• Aspen’s strategy of extending average loan terms and launching longer dated Bridge to let and buy to let products increases exposure to property market cycles and refinancing conditions. A prolonged downturn in U.K. property transactions or refinancing capacity could slow repayments, elevate credit losses and dampen divisional profits.

Valuation

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

• The assumed bullish price target for S&U is £23.55, which represents up to two standard deviations above the consensus price target of £20.18. This valuation is based on what can be assumed as the expectations of S&U's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £23.55, and the most bearish reporting a price target of just £17.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be £165.3 million, earnings will come to £39.0 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of £19.7, the analyst price target of £23.55 is 16.3% 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.