Regulatory Engagements And Supreme Court Ruling Will Secure Resilience

Key Takeaways

• Improved lending criteria and technology investments at Advantage Finance suggest potential growth in lending activities, positively impacting revenue and earnings.
  
• Aspen Bridging's strong profit rise and increased debt indicate robust growth and favorable market conditions support long-term revenue and margin enhancement.
  
• Regulatory uncertainties and increased finance costs are pressuring S&U's margins, while credit quality issues threaten future revenue and earnings stability.

Catalysts

Provides motor, property bridging, and specialist finance services in the United Kingdom.

• Advantage Finance has completed regulatory engagements, improved its lending criteria towards higher-quality tiers, and invested in technology platforms, indicating a potential rebound and growth in lending activities, which could positively impact future revenue and net earnings.
  
• Aspen Bridging's strong performance, with a 50% rise in profit and increased book debt, suggests continued robust growth expected in the coming year, likely boosting overall group revenue and profitability.
  
• Aspen's long-term growth outlook is supported by favorable market conditions in the bridging finance sector and strategic investments in product capabilities and operational efficiency, which could enhance future revenue streams and margins.
  
• The resolution of regulatory issues and the anticipation of the Supreme Court decision that could favorably impact credit accessibility supports an optimistic outlook for revenue growth and a reduction in regulatory costs that have weighed on margins.
  
• S&U maintains robust financial health with reduced gearing and considerable borrowing headroom, enabling strategic growth initiatives and potential cost management improvements, possibly leading to enhanced earnings and financial stability.

S&U Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming S&U's revenue will grow by 30.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.6% today to 19.4% in 3 years time.
• Analysts expect earnings to reach £34.8 million (and earnings per share of £2.76) by about June 2029, up from £23.7 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 11.2x on those 2029 earnings, up from 9.8x today. This future PE is greater than the current PE for the GB Consumer Finance industry at 7.6x.
• 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 9.12%, as per the Simply Wall St company report.

Risks

• The Supreme Court decision, expected by mid-year, introduces uncertainty that could significantly impact business operations and customer confidence, potentially affecting revenues and profits.
  
• Regulatory challenges linger in the motor finance segment, leading to an £11 million impairment charge, which has already impacted net margins.
  
• Finance costs have increased by £3 million due to higher average borrowings and raised Sonia rates, negatively influencing overall earnings.
  
• The company faced an exceptional item of £2.7 million related to historical collection charges, which reflects regulatory risks and adds to cost pressures, reducing net income.
  
• Advantage Finance experienced increased arrears and a decline in net receivables, highlighting credit quality issues that could impact future earnings and revenue growth.

Valuation

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

• The analysts have a consensus price target of £24.57 for S&U 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 2029, revenues will be £179.0 million, earnings will come to £34.8 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 9.1%.
• Given the current share price of £19.15, the analyst price target of £24.57 is 22.0% 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.